Credit card firms reducing credit limits: What can you do?

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The coronavirus has halted almost all economic activities and rendered millions of people jobless. At such a difficult time, many were dependent on their credit card limits to ensure they don’t run out of resources. However, as financial conditions worsen, credit card companies are also starting to feel the pinch and have started reducing credit card limits of their customers, who have already been hit hard by the coronavirus pandemic.

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Credit card companies reducing limits

More and more users are complaining that their credit card limits have been reduced for no reason amid the coronavirus outbreak. Some are also claiming that the credit card company slashed their credit limit without any prior notice.

Last week, Synchrony Financial, the company behind cards such as J.C. Penney, Gap and American Eagle Outfitters, said it is closely managing customers' accounts. Also, the company is using credit reports and its own data to re-evaluate cardholders’ creditworthiness, according to Bloomberg.

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In a regulatory filing on Wednesday, Discover Financial Services noted that it is slowing its efforts to add new customers. Also, the company said it would take a financial hit by allowing customers to skip payments, or delay the accrual of interest. Moreover, its CEO Roger Hochschild noted that they are constantly evaluating the creditworthiness of customers.

“As the number of loans enrolled in these programs increases, our financial results will be adversely impacted in the short term due to forgone interest,” Discover said.

Financial experts say they were expecting this to happen at some point, and it now seems to have started. Moreover, they say that credit card companies don’t need to give any prior information on reducing the credit limit. However, the experts do say that reducing the limit is more likely for the credit cards that are not used much or are unused.

Impact on your credit score

Why the card companies are doing this is understandable as well. The card companies consider several factors to arrive at your credit limit. These factors are your income, type of card you are applying for, your credit score, payment history, credit utilization ratio, the companies’ own policies and more.

A change in any of these factors will push the issuer to recalculate your credit limit. Even if none of these factors change, any drastic change in the overall economy may force the card companies to re-evaluate your credit limit as well.

Due to the ongoing financial crisis, there is less money in the economy and the default risk is more likely. Thus, to manage such risk, the card companies are lowering the limits. Card companies did the same during the 2008 financial crisis as well.

“Banks are taking a balanced approach informed by economic data, which is consistent with legal and underwriting obligations to ensure credit lines match consumers’ ability to repay,” a spokesman for the American Bankers Association, Jeff Sigmund said, according to CNBC.

Credit card companies reducing limits during the coronavirus pandemic would have a negative impact on the cardholder’s credit score as well. Now with the reduced credit limit, cardholders will spend a greater percentage (or debt-to-limit ratio) of the available credit. This debt-to-limit ratio is a key component of the credit score.

For example, if your credit card limit drops from $8,000 to $4,000, but you continue to spend $2,000 per month. In this case, your debt-to-limit ratio would increase from 25% to 50%. A debt-to-limit ratio of below 30% is good for your credit score.

This means, even if you continue to pay the credit card dues regularly, your credit score may drop, and you may be denied a loan as well.

 What to do?

More and more card companies are expected to reduce the credit card limits of their customers going forward. If your card limit has remained constant, there is no guarantee that it will remain so. So, it is recommended that you regularly check your credit card limit for any change.

Ethically, a card company should send you information (via email, message or mail) that your credit limit has been reduced. If not, you can check your limit online or through the app. If your credit card limit has been reduced, there are a few things that you can do.

You can always request the credit card company to raise the limit again. There is no guarantee that your limit would be restored. If you have a good payment history and you can assure that you will continue to make the payments in a timely manner, there are chances that your request would be granted.

In case your request is not granted, you can also apply for a new card to compensate for the lost credit. However, you must be careful in selecting a card. Many card issuers have a threshold over how much credit you have across cards. So, try to get a card from another issuer. For instance, if you already have a Chase-issued card, then try to get a card from Amex or Capital One.

You also have an option to enroll for temporary hardship assistance, such as deferring a card payment and waiving fees, provided your card company offers it. You can always ask your card company if it has launched any such program.