A recent visitor to our site was outraged when her credit limit was cut nearly 90% by American Express.  So angered was this visitor that she no longer wanted to do business with the company and planned on cancelling her credit card.  Many others have probably felt the same way when, for no apparent reason, their credit card company suddenly slashes their credit limit.  However, this is not necessarily the best way to get revenge.  In fact, it can ultimately make matters worse.

As the credit crunch has intensified, many credit card companies have sharply lowered credit limits on some consumers while raising interest rates on others.  Neither of these tactics makes for happy customers.  However, fighting back against your credit card company by closing your credit cards can do much more harm than good.

Having lower credit limits poses more than the obvious problems.  What few know is that credit usage plays a critical role in the calculation of credit scores, and thus, in the way other creditors view you.  The key issue here is the percent of available credit being used. 

If, for example, you had a $2,700 balance on a credit card with a $10,000 limit, your credit report would show that you are using less than 30% of your available credit.  However, if your credit limit were to be cut to $3,000, you would now be using 90% of your available credit.  To a bank, this is a red flag.  It makes it appear as if you are maxed out.  And in uncertain times such as these, lending money to maxed out consumers is not a high priority to banks.

The effects of a credit limit decrease can increase the cost of borrowing for auto, student, and even home loans.  And should you want to take advantage of a 0% balance transfer to help pay down your debt, credit card companies may be less likely to offer you one.

The worst thing a person can do, especially one who has a low balance relative to their credit limit, is to cancel their credit card to spite the issuing bank.  Keep the card open; just don’t give them your business.  Additionally, here are a few other steps you can take to lessen the blow of a credit limit decrease:

• Pay down your credit card debt:  Although this is easier said than done, if you have cash available, use it to reduce the percent of available credit you are utilizing.  Not only will this save you money on interest, it will help improve your credit score.
• Get a new credit card, FAST:  It can take a few weeks for a change in your credit limit to get reported to the credit bureaus.  During that time, your credit score will reflect your old usage of available credit.  By acting quickly, you can get approved for a new card and use that card to transfer balances.  (Note:  You can apply online for 0% credit cards on our main site.)
• Negotiate with your credit card company:  You may want to practice this on a brick wall first, just to get used to the response.  Initially, it may be hard to get your credit card company to change their mind.  In fact, it may be impossible.  However, by paying down your debt and proving to the company that you are in good financial shape, you may be able to get your limit increased.  Just don’t expect results overnight.  It may take a few months to get them to consider your request.

When a credit card company cuts your credit limit, they are not only limiting your ability to spend, but also, limiting your ability to borrow from others.  Taking quick, decisive steps is the best move to make.  One of those steps shouldn’t be cutting up your credit card.  If anything, getting a new credit card quickly may be the best thing you can do to limit the damage to your credit score and help you maintain a healthy credit score.

For additional information on current credit card offers, please visit our site to review, compare, and apply online.  We list detailed information on close to 100 credit cards as well as links to online applications.

Additionally, if you have any insights you think would be helpful to others, please leave a comment so others can learn from your experience.

Let’s face it.  Credit card companies have lower approval ratings than the current president.  They are the people who charge us absurd fees and sometimes astronomical interest rates.  However, they also provided a necessary evil for many consumers, not to mention a multitude of ways to save money.  Yes, I said it.  Credit card companies do help people save money.

How?  For starters, the 0% introductory rates on purchases and especially balance transfers have helped keep a lot of money in savvy consumers pockets.  And for those who pay their credit cards in full every month, cashback and other rewards credit cards actually earn consumers money. 

However, it is easy to be unsympathetic to credit card companies, if not downright pleased to read about their troubles.  Unfortunately, what we all dislike about credit card companies will ultimately hurt everyone with plastic in their wallet.

Yesterday, Fitch Ratings predicted credit card losses could hit new highs in 2009 (see http://www.reuters.com/article/companyNews/idUKTRE4AB0DG20081112?symbol=DFS.N).  If, and to what extent, these losses occur will have a tremendous impact on the wallets of all credit card users.  Here are just a few examples of how losses at credit card companies can impact your life:

1.)  The End of the 0% Era:  Over the past five years, getting a 0% APR credit card has not been a difficult task.  However, these days of “free money” may disappear faster than Lehman Brothers.  In particular, the 0% balance transfer has helped countless consumers save hundreds, if not thousands of dollars a year on interest.  Without this refinancing safety net, many consumers will find it harder to get out of debt.

2.)  The Return of the Annual Fee:  Presently, the majority of credit cards charge no annual fees.  Those that do are generally tied to rewards programs that offer benefits such as frequent flyer rewards.  However, consumers who pay these fees do so out of choice, not necessity.  Soon, choosing to have an annual fee may not be an option.

3.)  Higher Fees & Interest Rates:  You think late and over the limit fees are high now?  In a year, we may be fondly remembering the days of the $29 late fee.  And interest rates?  How does 22% sound?  Many consumers with above average credit may find themselves unable to get better rates.

Of course, the scenarios above are all hypothetical.  The recession could be less severe than expected.  Banks may satisfy their hunger for money with our taxpayer funds.  Or, in what I consider a best case scenario, money will start growing on trees.

Unfortunately, there is little evidence to support any of these options, although I did receive an email about a money growing tree in Nigeria.  All I had to do was wire $10,000 to a numbered bank account to get the map.  I’ll let you all know how my money tree search goes, but in the meantime, the best we can do is hunker down, take advantage of 0% interest rates while they exist, and a shed a collective tear for credit card companies, before they make us cry with higher fees, absurd interest rates, and credit limits that won’t cover dinner for four at the Olive Garden.

For many months, credit card companies have been making it more difficult for consumers to gain access to credit.  At the same time, they have been reducing credit card limits substantially.  In fact, in a recent Federal Reserve consumer credit survey, it was reported that 60% of credit card companies cut credit limits on less than prime borrowers.

Many had been hoping the “bailout plan” would help ease the credit crunch and encourage banks to lend to consumers.  Unfortunately, however, that seems like a fantasy.  Early this week, a J.P. Morgan Chase official was quoted as saying, “loan volume will keep going down as we continue to tighten credit.”  This is not good news, as Chase is one of the nations largest credit card issuers.

As banks tighten the reigns on credit, consumers may ultimately find themselves in  what is known as a “negative feedback loop.”  In essence, this is a scenario in which, for example, having a lower credit limit negatively impacts your credit score, which in turn makes it more difficult to get new credit, which in turn leads to higher interest rates on everything from credit cards to mortgages. 

These types of scenarios could ultimately make this credit crunch a credit crisis for many consumers.  The banks, of course, will profit.  When a person whose credit score has been decreased because of a credit limit cut applies for a mortgage, the same bank that cut that person’s credit limit can charge them more for a mortgage.  After all, that person does have a lower credit score.

The losses incurred by banks because of their reckless lending are being paid for with American tax money.  That’s enough to irk those of use who have been responsible with our finances.  But now, it appears the banks are once again operating out of fear and greed, and responsible consumers will continue to foot the bill for the mistakes of the banks.

When it comes to credit cards, and in particular to credit limits, there are very few remedies consumers can take to prevent banks from assaulting their credit scores.  However, one thing worth considering is applying for a new credit card to increase your available credit limit or to transfer your high interest balance to a 0% credit card.  A move such as this might not only save you money on in the short term, but help keep your credit score high, and thus lower the cost of borrowing for other financial products.  For more information on 0% credit cards and balance transfer credit cards, please use the left navigation to review and apply for credit cards online.