Credit Card Companies Change Limits, Change Lives

When credit card companies unexpectedly lower limits it can hurt you other ways.

March 3, 2009 — -- Millions of Americans have seen their credit card limits lowered since the economic crisis began, as credit card companies have tried to protect themselves against risk.

And it's having a devastating ripple effect on consumers' credit.By lowering people's credit card limits, banks are also lowering people's credit scores in many cases.

And that means these families will pay tens of thousands of dollars more for things like mortgages and car loans.

Mary and Sean Craig, of Ashburn, Va., yearn for their daughter, Sephie, to have a sibling close to her age. But today those plans are on hold because they don't want to bring another child into the world while their finances are uncertain.

"We both really want another baby," said Sean Craig. "And we just can't at the moment."

The Craigs' credit card company cut their limit by more than half -- slicing it from $15,000 down to $7,000 -- not because their situation had changed but because the company's had.

"I called the credit card company and asked them why they had reduced my credit limit," Sean Craig said. "And she said that it was due to the current economic crisis."

Lower Credit Score

The lower limit had a ripple effect, causing the Craigs' credit score to plunge from a healthy 720 to a less flattering 683.

Why? Because one of the biggest factors in your credit score is the amount of debt you carry compared to the amount of credit you've been approved for.

This ratio of credit to debt is usually an important indicator because it catches people who have charged up their cards to the hilt. But the Craigs hadn't charged up their card. Rather, the bank had dropped down their limit, so suddenly they were much closer to that limit through no fault of their own.

Turned Down for a Loan

Already, the Craigs have felt the first repercussion. They had been working to get a bank loan to consolidate their debts, but with their new, lower credit score they were turned down.

"Because it's down we can't get our loan," Mary Craig said. "And because we can't get our loan, we can't have our baby."

Mary Craig checks every day, worried that their other credit card company now has an excuse to raise its interest rate. If the rate were to go up 10 percent, which is typical, it would cost the Craigs an extra $7,700 to pay off that card.

"I'm very angry that they can just do that," Mary Craig said. "They just change the rules whenever it suits their needs."

And it gets worse. With the lower score, if the Craigs refinanced a $250,000 mortgage, they would be charged $50,000 more in interest during the life of the loan.

ABC News asked Scott Talbot of the Financial Services Roundtable, an industry group that represents all the major banks, whether banks realize their actions are having such a devastating ripple effect on people's credit.

"Absolutely, these are real Americans we're talking about. Every single file is a real family," Talbot said.

"Unfortunately, it's part of your contract and it's possible under your contract, it's permissible," he said.

Fighting Back

But there are steps you can take to keep your credit card company from lowering your limit and, in turn, your score.

Don't charge more than 30 percent of your credit limit on any one card. More than 30 percent on multiple cards is even more of a red flag.

Don't pay late, even by a day. Set up an automatic payment if you have to, to make sure you're on time.

Dormant accounts are the first to get cut or canceled, so if you want to keep your card, use it at least once a quarter.

If your credit card company raises your rate or lowers your limit, call and ask to be reinstated. Often a computer program makes these moves automatically, so often if you call and speak to a human being you can get the decision reversed.

Finally, you are allowed to place a letter in your file at the big three credit bureaus -- Equifax, Experian and Transunion -- explaining why your credit score has taken a hit. The letter is not normally used for this purpose, but you could explain that your circumstances have not changed, but the bank lowered your limit because of its troubles. Hopefully other businesses that consider you for credit will see that and understand.