If money is suddenly tight, you might turn to a credit card to finance your everyday needs or wants. But the amount you can put on your credit card might be a lot less than you expect.
CNBC reports that credit card companies are slashing credit limits — sometimes without informing cardholders.
The move comes as lenders are under more financial pressure, thanks to the fallout from the coronavirus pandemic. Lenders suddenly have less cash in their coffers, and they are becoming increasingly worried that out-of-work cardholders might fall behind in their payments.
So, they are rolling back credit limits. Such a move can leave desperate borrowers out in the cold.
In addition, any credit card user who isn’t careful might see his or her credit score suffer. As CNBC explains:
“With a lower limit, consumers are more likely to use a greater percentage of their available credit each month (or debt-to-limit ratio), which has negative effects on their credit score and ability to borrow money.”
In general, it is best to keep your debt-to-limit ratio, also known as a credit utilization rate, below 30%. That would mean that if your credit limit is $10,000, you should not let your credit card balance exceed $3,000.
But if your credit card company slashes your credit limit from $10,000 to $5,000, and you continue to let your balance reach $3,000, your credit utilization rate will jump from 30% to 60%.
How to protect your credit score
If you discover that your credit limit has gone down, call your lender and ask to have the limit bumped back up. As we have reported, simply asking for a higher limit often works.
Just be careful not to then increase your spending, as increasing both your credit limit and your credit card balance will not necessarily improve your utilization rate, as we note in “7 Ways to Boost Your Credit Score Fast.”
Another relatively simple way to reduce your utilization rate is to pay down your credit card balance more than once a month so it doesn’t get as high.
Failing those options, you should consider scaling back your spending or paying down some existing debt. Even better, do both.
Paying down debt is not easy, particularly in tough economic times such as these. But we’ve got plenty of tips for reducing what you owe in “8 Surefire Ways to Get Rid of Debt ASAP.”