What to do if a Credit
Card Issuer Cuts your Credit Limit
You have alternatives to
regain your limit -- and a higher credit score
By
Dana Dratch
Normally, when a consumer has a problem with a
credit card company, the solution is simple:
Find a new card and
walk. But when the credit limit drops, the credit score may take a hit. So it
can be more difficult for cardholders to take their business elsewhere.
It could "have the effect of keeping you
captive," says Ed Mierzwinski, consumer program director for the U.S. Public
Interest Research Group. "If you have a lower credit score, you're less likely
to be recruited by competitors with better terms."
But there are a few strategies that may mitigate
the damage to your score:
Fight back. Call the card
company and try to negotiate a higher credit limit. Reference your spotless
payment history, and your (formerly) healthy ratio of available credit to debt.
Use all the usual tricks: Ask for a supervisor, and work your way up the ladder.
While it won't always work, it's worth trying.
Pay down the balance. If your
credit score drops as a result of this move by the card company, that's largely
because the scoring formula calculates that you're using too high a percentage
of your available credit (even if it's the same dollar amount you've been
shouldering for years). So if you lower the balance, you lower that percentage
(if the company doesn't decrease it again), and you'll raise your
score. Smartest move: Wipe it to $0, and use the card only infrequently for
small items only to keep it active.
Call your other cards and request a limit
increase. Like explosives, you have to handle this strategy carefully.
If it backfires, it can cause some damage.
You need to know that if the card bank does a
"soft inquiry" (doesn't pull a new copy of your credit report), it won't affect
your score. If card bank does send for a copy of your report, that "hard
inquiry" could lower your score for up to one year.
Rule of thumb: If you can log onto the card site
and press a button to request a limit increase, that's usually a "soft" (nondamaging)
inquiry, says Joe Ridout, spokesman for Consumer Action. But if you have to give
any information, such as your Social Security number or employment information,
that's going to ding your credit -- it's a "hard" inquiry. If you request an
increase by phone, apply the same litmus test. And ask about hard and soft
inquiries.
Open a new account. Again, this
tactic isn't for everyone. Your score still has to be fairly decent. (You may
need to move quickly.) And there will be some short term damage to your score as
a result of the inquiry and new line of available credit. "A year from now, the
inquiry will have no effect, whereas the higher limit will help you," says Barry
Paperno, manager of consumer operations for Fair Isaac Corp.
But consider carefully. "For a lot of us, it
would open the door for more spending," says Ridout.
Don't cancel the old card. Even
if you never use it, that unused available credit will help your credit score.
"I paid the balance but left the account open," says Orange County, Calif.,
resident James O'Neill. "If I ever need it, it's there."