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Your credit card limit was just cut. Now what?

October 28, 2010

By Barbara Marquand | Money Rates Columnist

You work hard to pay your bills on time and reduce your credit card debt. What do you get in return? Under business as usual, you get a better credit rating and access to more credit. But in this uncertain economy, you might get the opposite - a credit limit cut. What gives?

Since the mortgage meltdown, credit card companies and other lenders have slashed credit limits to reduce risk exposure, and the trend has continued in the ever-so-slow recovery.

Credit card companies traditionally adjusted credit limits whenever they thought customers were at greater risk for defaulting. What's unusual these days is that the adjustments occur even when customers' credit reports indicate no change in riskiness, notes a March 2010 study by Fair Isaac Corporation (FICO), developer of the FICO credit score. According to the FICO analysis, 10 percent of US credit consumers saw a reduction in their credit between April and October 2009, with no risk triggers popping up in their credit reports during that period.

These consumers tended to be very low risk, and their credit card accounts had low balances, long credit histories and few, if any, missed payments, FICO reported.

In some cases credit card companies have cut limits after customers have paid down their balances, a phenomenon Consumer Action termed "follow me down."

So what should you do if your credit limit is cut?

• Check your credit reports

Check your credit reports to make sure they contain no errors that could have prompted the credit limit change. You're entitled to free, annual copies of credit reports from each of the three major US credit reporting bureaus. All three reports can be obtained through AnnualCreditReport.com

• Keep your credit card balances low

An estimated third of your FICO credit score is based on how much you owe and your credit utilization, which is the ratio of your debt to your available credit. Consumers who use a large proportion of their available credit are more likely to default. Keep your credit card balances below 30 percent of your credit limits to maintain a good credit score. Remember, your credit utilization ratio will go up, even if you don't increase spending, if your limit is cut. That means you need to pay down balances further just to maintain your earlier credit utilization ratio.

• Avoid risky credit card behavior

Don't give credit card companies more reasons to cut your credit limits. Among the risky behaviors that raise red flags are exceeding your credit card limit, getting frequent cash advances, overdrawing checking accounts or bouncing checks, FICO says. Track your credit card account closely online, and sign up for your credit card's transaction alert service to let you know if you're spending close to your limit.

• Consider shopping for another credit card

Shop online for the best credit card rates if you want to replace the credit you lost when your limit was cut.

Finally, pay attention to notices from your credit card companies. What might look like junk mail could contain important information about your account.

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