Protecting yourself from credit card changes

May 20, 2009 7:06:25 PM PDT
Many people are having their credit card limits drop and this can be devastating to their credit scores.

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If you are using half of your credit limit, you look pretty good to lenders. But if your credit card company drops your credit limit in half, you are now tapped out and look like a potential deadbeat.

Wanda Torres was at her long-time Daly City home when she received a call from her credit card company.

"Even though I had a credit limit of $20,000, he was reducing it down to $7,000," said Torres.

That was the exact amount she owed. She had never missed a payment and always paid on time. A higher debt to limit ratio means a lower credit score.

"And I asked him if this had anything to do with any of my credit reports with one of the agencies and he said absolutely not, that it was the economy," said Torres.

"It is called balance chasing. Balance chasing is where the credit card companies keeps lowering the limit down to the balance," said Emily Davidson from Credit.com.

Davidson says these moves can really cost consumers; that the same company that dropped the limit, may now lower the boom.

"They can come back and see that your credit score has gone down and apply even more negative changes to your account," said Davidson.

Which leaves our consumer wondering what would be her best move?

"Should I pay this off? Should I pay a little bit or the whole thing?" asked Torres.

Wanda might want to move to Rossmoor, so she needs to keep her credit score high.

"So I don't know what I should do to correct this situation," said Torres.

"Generally speaking if the consumer receives less available credit and their balances stay the same, that would have a negative impact on the score," said FICO Vice President Tom Quinn. "The best bet for her would be to pay off that card in full so it has a zero balance for the next time the lender pulls her credit report and gets the score."

If her card is canceled, she may want to apply for another card. That way she will have roughly the same available credit, so her debt to limit ratio doesn't get out of control.

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