Did you know that if your credit card provider decides to one day lower your credit card limit that your credit score could be negatively affected? 
Balance-to-limit ratio- the amount you owe relative to the credit line being extended makes up roughly 30% of your overall credit score.
So if you had a credit card with a $2,500 balance and a credit limit of $10,000, you were in a decent spot (25% balance-to limit). Suddenly, you get a letter in the mail from your credit card provider stating that your credit limit on this card has been lowered to $5,000. Now you are in a not-so-good spot as your balance-to-limit has automatically increased to 50% without any activity on your behalf. (no late payments, no extra purchases…nothing.)
Hardly seems fair does it?
What I have seen is a little more drastic. Many of these credit limits are being lowered to the “actual amount owed” which puts you in an even bigger predicament. Now you would be at 100% balance-to-limit, which makes you look like someone that is more aggressive with your use of credit than you really are.
How can you avoid this?
Something that I have been teaching my clients for years is how to manage their credit in a way to NOT leave themseves open to this type of situation. How you handle your credit card balances should be in direct relationship with your overall budget and financial plan. In this new world of financial rules and regulations, we must all adjust in order to try and eliminate the chances of landing in a bad place financially through no fault of our own.
“Someone decided to lower our credit card limit and now our credit is shot” should not be a phrase that comes out of your mouth if you have prepared properly. Feel free to contact me in order to discuss this further. ”
Action Excercise: Take an inventory of your outstanding revolving debt and calculate how long it would take you to pay down the balances to 50% if your credit card providers would suddenly lower your credit line to what you currently owe.
If it would take more than three months to bring the balances down to 50% you may want to begin a savings stategy that will help you avoid this situation and the effects on your credit should this happen to you.
Preparing prior to a disaster is the best way of surviving it”
Best Wishes
6. October 2009 at 11:07 PM
This is a great post. It makes complete sense. It’s simple and very effective. Thanks for sharing this.
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Caraballo & Associates Reply:
October 7th, 2009 at 6:39 AM
The “did you know” section was created in order to share quick and useful tidbits of information. I will be adding more of them soon. Feel free to check back in on a regular basis. Thanks for reading! If you get a chance, please share or retweet with your online friends or network. Thanks
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2. February 2010 at 4:13 PM
Jose, thanks for this great bit of info. I’m wondering why the credit card companies would do this? Is there some situation/action/pattern one should avoid or know about so this doesn’t happen? Thanks! Amy
Amy Posner´s last blog ..Is Happiness a Choice?
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3. February 2010 at 2:45 PM
There are various ways to alleviate this impact and I share them in my consulting practice. But a good rule of thumb (credit and financial-wise) is to not carry balances that are anywhere near the maximum for a long period of time.
It seems somewhat obvious, I know but you would be surprised how many people don’t seem to get this. If you HAVE to have such high usage on your cards. There is obviously a bigger problem that needs to be addressed.
Let me know if you would like to know more on this subject and thanks for visiting.
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8. March 2010 at 9:54 PM
This is one animal I really don’t understand that much.
Thanks for some clarifying info about it!
Val
Val Wilcox´s last blog ..The Power of YOU!
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8. March 2010 at 10:52 PM
Hey Jose,
Thanks for this tidbit of information. I was not aware of that. I know a lot of changes have been taking place in the credit card finance world as a result of what has happened in the banking world lately. This is just another one to be aware of. Your clients are fortunate to have someone who’s really up to date on all the changes that are taking place.
Thanks for the update.
Don Enck´s last blog ..Honey….Did You Pack The Bags?
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8. March 2010 at 11:14 PM
Wow, solid practical financial information we can use! I cant imagine the bind I’d be in score wise if my credit cut in half! There’s absolutely ZERO fluff in that post, unlike so much financial advice today. The action exercise is a neat tool I had not seen before to enable you to know how risky of a bind you may (or may not) be in!
Thanks!
Kimberly Castleberry´s last blog ..How To: Change Your Twitter Name Without Losing Followers
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9. March 2010 at 9:45 AM
Jose:
I have never heard of this before. Thanks for opening our eyes to the fact and for your advice about the future of financial changes. Your team is very fortunate to have you at the helm!
Thanks so much!
Linda.
Dr Linda Douglas´s last blog ..WHAT IS YOUR STORY and HOW WILL IT MAKE A DIFFERENCE?
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