lifeinmycubicle

You may have received a mail from your Credit Card Issuer that your credit limit has been reduced. There are a few reasons why your credit limit has been lowered. It could be caused by late or missed payments, going over your credit limit, a sudden drop in your credit score and high outstanding balance. Another common reason is due to a change in financial situation. You may have filed bankruptcy or due to short sale or foreclosure. Lending standards have tightened and Credit Card Issuers are taking a closer look at their clients’ creditworthiness. They are looking at their clients’ jobs, if they are or will be affected by the weak economy and where they live. If Credit Card Issuers see reasons that you may potentially default, they will lower your credit limit to protect them and you as well. Here are a few tips on how to protect your credit card limit from being reduced.

1.  Make sure you read your monthly statements. Do not only check the balance portion and account activities. Check if there is a letter enclosed or a notice added to the regular monthly statement.  Credit Card Issuers notify you via mail that your credit limit has been reduced. It is important that you are aware of this change to avoid an overcharge.

2. Always pay on time. Remember that timely payments account for 35% of your FICO score. All you need to do is show that you are responsible. You do not need to pay lots of money each month. If you don’t have extra money to add to the minimum payment, it’s okay to pay just the minimum balance. Just make sure you always pay on time.

3.  Manage your debt-to-credit-limit ratio which accounts for 30% of your FICO score. For example you have 2 credit cards. On credit card A, you owe $3,000 and credit card B, you owe $5,000. Your total debt is $8,000. Your credit limit on credit card A is $7,000 and the limit on credit card B is $9,000. Your total credit limit is $16,000. What does this mean? The total of what you owe which is $8,000 is 50% of your total credit limit which is $16,000. You have 50% debt-to-credit-limit ratio. It is recommended not to use more than 50% of your credit limit. Remember, the lower the ratio, the better.

4. Pay more than the minimum requirement so you can pay off your debt quickly.

5. Don’t apply for a lot of credit cards all at once. Credit Card Issuers will consider you as “Risk”. Multiple credit inquiries in one month will also bring down your FICO score. Also, have a good mix of credit cards, retail cards, loans where you make timely monthly payments. Combining these two (new credit activity and mix of credit cards) accounts for 20% of your FICO score.

Did you receive a letter from your Credit Card Issuer informing you of interest rate increase? You may probably wondering why your interest rate is going to increase. You may have been late on your credit card payment and even payment on your other credit card. Going over your credit limit and if your credit score dropped, these could be a few reasons why. Do you have a lot of credit cards with high outstanding balance? Did you recently file bankruptcy? Did you short sale your home? These may be the other reasons why your credit card issuer is increasing your interest rate. Now, you want to know what to do, right?

1. You may choose to Opt-out of the increase in rate. Credit card issuers send you 15 days notice before they increase your interest rate. You must act fast if you decide to choose this option as you are only given a short period to opt-out or reject the change in interest rate. What does this mean to you? If you opt-out, you can continue paying your balance at your current interest rate and once you’ve paid off the balance, you will no longer be able to use your credit card as your account is closed. What are the disadvantages of choosing to opt-out? When you close a credit card, it will hurt your credit score. That is the biggest disadvantage. You may have a high credit limit on the card and once it’s closed, you can no longer be able to use it again. Meaning, you are losing one of your credit cards with high credit limit.

Also, if you choose to opt-out, make sure you respond in writing. Write a letter to your credit card issuer letting them know that you are opting out of the higher interest rate. When you mail your letter, make sure send it via certified mail with return receipt request. Why? You need proof that you responded and mailed it to your credit card issuer within the period of time given to you and proof that
they have received your mail. Make sure too that you have a copy of the letter that you sent to them. Make it a habit that you always keep proof whether it’s personal or business. This is a good way to protect yourself.

2. If you choose not to opt-out, pay off the balance before the date of the increase takes into effect.

3. You can also lower the balance on that card before the new interest rate takes effect. Then, once the new rate has taken effect, continue making payments and make sure you’re always on time and do not go over the limit. If you can stop using that card, much better. After six months, call your credit card issuer and request for a lower interest rate.

4. If you think the reason why your credit card company is increasing your interest rate because of one late or missed payment but you have been previously paying on time, you may call your credit card issuer and negotiate with them. Remember, there is no harm in trying. It’s better to ask.

5. Another option is to transfer your balance to a lower interest rate card. When you make balance transfers, keep in mind the balance transfer fees you will have to pay. Figure out whether balance transfer is a wiser move than keeping the card that you have now. You might end up paying more on transfer fees than paying off the balance on the card with the higher interest rate.