Yesterday I got a call from American Express. I was curtly informed that my True Earnings American Express Cash Rebate Credit Card limit was reduced 90%. It isn’t a really big deal because I don’t need that sort of limit. I’ve never used more than 40% of the limit anyway. But I was still pissed. It’s very useful when traveling and I enjoy the cash rebate I get with the card. I’ve been putting my tuition on it and then paying the balance off, which allows me to get some free cash. Some of the benefits include:
I guess Amex decided they weren’t making any money on my account so they basically told me my credit limit was now $2,500. Since my revolving balance is close to that amount every month, my ratio of available credit to debt ratio will look like its over 80% which will hurt my credit score.
Apparently this isn’t an isolated incident. Smart money just had an article about credit card companies reducing credit limits on numerous borrowers, sometimes with the current balance exceeding the new limit.
While the fees, frozen accounts and default interest rates resulting from credit-line cuts can sting your finances, they can do some serious long-term damage to your credit score. Your credit utilization ratio — the total amount of debt you owe in relation to the amount of credit available to you — accounts for roughly 30% of your score. A credit line cut has the potential to decrease your score by 50 points or more if you don’t have much other available credit, says Craig Watts, spokesman for FICO, the company that calculates and issues the credit score that most lenders use.
One of my friends just graduated from USC’s Marshall School of Business. Last year he told me that a visiting professor announced in class that consumer lending was going to dry up and people would no longer be able to get credit. His advice was to get it while they still could!
Seems like that day has now arrived. Regardless of your credit, skittish credit card companies are reducing credit limits. How do they expect to make any money if they’re not lending money?
But more importantly, what good is your credit if you can’t borrow any money? Do you think this might drive people to max out their credit cards while they still have available balances and then default on them?