Why Me? How To Understand Your Credit Card Limit Reduction

There are really no rules in place that stipulate why or what reasoning is being used by credit card companies to lower consumers' credit limits on their accounts. Normally, the consumer has an idea why the card company has taken certain steps to limit their risk if the consumer had knowledge of a late payment or went over their credit limit, but now the only reason seems to be is that you are a credit cardholder with an outstanding balance.

Many consumers when receiving their monthly statement are finding their credit card limit has been reduced or their interest rate has been increased without warning. What is true and understood by most consumers is that once their credit limit is adjusted, it also may result in a change in their credit score.

Most consumers are asking how credit card issuers are making the decision to lower their credit limits especially if their credit score is over 720, they have never been late making their payments, they have not gone over their credit limit and they have no negative information in their credit report. The easy answer would be because of the current economic situation. However, there are other factors that will affect your credit card limits also.

First, every account has a statistical value based on usage. Credit card accounts paid in full or that are rarely used are of no value to a credit card company. There simply is no money in it for the company because the cardholder is not paying interest on a balance, there are no annual fees associated with the account and most importantly, these type of consumers are rarely accessed transaction fees when they do not follow the terms and conditions on their credit card account.

A second factor is risk quotient. Credit card companies now consider more heavily whether it is likely a customer will be delinquent on their account. Remember, your creditors pay the credit reporting agencies for your financial information. If a credit card issuer sees where you have defaulted on another credit card account, the credit card company in an effort to protect their financial interests will take the appropriate action to decrease their risk.

And last, you do not use enough of your credit line. Credit card companies are now reviewing your spending patterns and in some situations will reduce your credit limits accordingly. There is a term used for this practice, it is behavioral analysis where card companies evaluate where you spend your money and how much.

If you have not used your credit card in awhile it sends a red flag to your credit card company which could result in your card company reducing your credit limit or even closing your credit card account. Keep in mind that you are still responsible for any outstanding balance on your account and that your credit history with the company remains intact for review.

Granted, interest rate increases and dramatic reductions in credit limits can send consumers deeper into financial stress, rather than encouraging them to pay their bills. Credit card companies are focusing on reducing their risk, which means they will take the necessary measures against consumers so they are not left holding the bag.

If you pay on time and are never late, you may still be considered a risk. Currently, card issuers are reviewing your payment habits, credit score, and even where you shop to determine how likely you will be to default on your account and become a risk to them. In this economy, the banks definition of risk is changing which benefits them in more profit, but the consumer is hit again with higher payments, less spending power and nowhere to turn for help.