Credit Card Limits

Credit card companies are not immune to the credit crisis, and one way they're protecting themselves is by lowering credit limits wherever and whenever they can.

You might have a perfect payment history and still wake up to a $5,000 card limit that's been reduced to $500.

One of the biggest victims in this whole economic meltdown -- besides the millions who've lost their jobs -- is the world's financial liquidity reserve. That means there's no credit anywhere because there's no money to lend.

Better about finances? Your rates might get cut

Ironically, the people who are most likely to see their credit limits cut aren't the people with the worst payment histories -- it's exactly the opposite.

People with no balances on their cards and a punctual payment history make much less money for the credit card company than do people with on-going balances and "helpful" late payment penalty charges. That kind of income, from both interest and ancillary fees, can help a credit card company's profit margin.

The card holder who incurs no extra penalties and pays off their balance before it can accrue meaningful interest (meaningful for the credit card company, that is) is more likely to see their credit cut.

Other reasons your credit limit has been slashed

Of course, credit card companies cut credit limits for other reasons, not just as a reaction to frightening economic conditions. If you've gone over the line from infrequently late payer to chronic payment problem, you're on the road to seeing your credit limit cut because the issuer is worried about getting their money back. Can't argue with that logic, right?

What to do if your credit limit has been cut

If you've seen your credit limit cut for no good reason, don't take it personally, and don't assume it's going to last forever. Credit card companies need and want to lend money -- that's what they do.

There's a very good chance that when the dust settles from this current uncertainty you'll see your limits go back up. Of course, if you want to see your credit limit go back up sooner, call the issuer and see what they can do for you. If your payment history isn't the motivation behind your credit cut, you could talk your way back up to your old limit.

Since Congress overwhelmingly voted to pass a credit card legislation bill protecting consumers from unfair interest rate hikes and fees, credit card companies have been working to get their rates increases in before the legislation becomes official. In other words, your credit card interest rates were likely to have gone up yesterday as credit card companies raced to raise rates before the closing bell.

For instance, one of our readers notified us this morning that she received a letter yesterday that Chase was increasing her credit card interest rate from 9% to over 13%. The verbiage in the letter explained the reason for the rate increase was in order to "maintain the profitability" of the account. The notice gave a couple of weeks time to either a) close the account or b) do nothing and accept the rate increase.

Why did credit card companies rush to increase rates?

Under the new legislation:

1. No more retroactive rate hikes - Credit card companies cannot increase rates on existing balances, but only on new balances.
2. Longer notification periods - Credit card companies must give 45 days notice, rather than just 15

What should you do if your credit card rates have been raised?

1. If you've had the card a while and have a history of good payments - You may want to keep it in order to keep the age of your good credit accounts as old as possible. Learn more about maintaining old lines of credit
2. If you keep low balances - Consider keeping the card. The amount you're paying in interest is pretty low.
3. If you keep high balances but good payment record - You may want to consider finding a lower credit card rate and transferring your balance.
4. If you keep high balances but have bad credit or payment history - Focus on paying down your account, improving your credit, and then try to get a new card with a balance transfer. Also, it doesn't help you if they hiked your rate yesterday, but under the new legislation, if your rate is increased and you pay your account on time for 6 months, they have to reduce your rate again to the introductory rate offer.

Have you recently received such a letter or experienced a credit card rate hike? Tell us about it and what you plan to do.

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