Goals, How To

Why Even Good Credit Might Get Cut

(Photo: Dan Esparza)

You can afford your mortgage, you have a high credit score and you pay your bills on time every month. So why did American Express just slash your credit limit? Could be because of where you shop?

A combination of the credit crisis and the increasing use of predictive analytic models for determining credit limits mean that it is no longer enough just to maintain a good credit rating. With credit card companies analyzing spending patterns, you have to pay more attention than ever to both where and how you shop.

Here are a few examples of some of the ways that good credit may get cut off.

Traveling Overseas

The internet has helped to create an environment where fraudulent transactions are so widespread and so expensive to prosecute, that most companies write off these transactions as a loss – or pass them on to the merchants who are victimized. As a result, credit card companies try to offer extra protection to their customers if a series of suspicious charges post to any individuals account, as a form of loss mitigation. The problem this poses for many travelers, is that the term ‘suspicious charges’ is very subjective. Say for example, you are from Des Moines, Iowa and your monthly credit card transactions consist of weekly trips to Ralph’s and your neighborhood gas station. In this case, your spending habits will be scrutinized if you finance a backpacking trip through Southeast Asia. Therefore, it is very important that travel isn’t funded solely on a credit card, because you might find yourself in a foreign country without funds when the available credit is slashed.

Spending in stores that have high-risk customers

Many customers do not realize that their credit limits may be reduced due to where they shop. American Express is on the forefront of this movement, wherein banks would include where customers spend as part of their credit-limiting decisions. the cards are used at places like casinos and bars. To the bank, these are improper or unsustainable use of credit, that has a higher repayment risk.

Don’t Go Near Your Credit Limit, or Over It

One of the most important factors of your credit score is your average ratio of balance to credit line you keep. Keep the balance below 20 percent of the credit limit ideally, and definitely below 50 percent, as this is viewed by banks as more responsible borrowing and not quite a warning sign that you are dependent on the credit. The larger the percentage of your credit limit occupied by balance, the more you are viewed by the bank as being incapable of repaying a debt owed.

Banks often change their terms of your lenders agreement via mail, and a letter regarding a credit line reduction can actually be sent to you after your line has already been reduced. With that said, if you have the propensity to continually keep a higher balance on a credit card, you are more likely to have a credit line reduction. But even someone who keeps a high available balance isn’t safe from this move by the banks. As a result, a credit line reduction could change your balance-to-limit ratio dramatically, further worsening your credit score.

Any bank may reduce a credit line in any way they see fit, and for example a $10,000 credit line with a $3,000 balance could be reduced to a $5,000 credit line with the same balance. This would mean that your balance-to-limit ratio would be doubled, an experience that is increasingly likely to happen to any individual, irrespective of their repayment history. In some extreme cases, a credit line reduction could even be instigated by a bank to a level that is right at the current balance, thus leaving the borrower in a position of potentially going over his/her new credit line when finance charges are assessed. This can have a ripple effect on other accounts, in that, other lenders may see this as a red flag, and consequently reduce your credit line as well. For credit cards, it is good to try and pay off your balance every single month, but if you can’t or if you are already in trouble, make sure to call as credit companies are very willing to renegotiate delinquent balances and interest rates, often reducing 27% rates all the way down to 10%.

Are you paying attention to your credit report?

Most people don’t properly manage or monitor their credit report. And given the current financial climate, banks are consistently looking at ways to stave off risk. Many banks realize that one way to do this is to increase the interest rates of individuals that are paying their bills on time. Interest rate increases typically occur as a footnote that is easy to overlook on a monthly credit card statement, or may be a letter written to you as a “Dear Valued Customer” letter on corporate letter telling you that after years of valued business, you are now being rewarded with a higher interest rate. These letters of course offer the customer an opportunity to opt out or not agree with the change of terms. The consequence is that your account will likely be closed after a certain grace period.

This means that, for those willing to stand up to the credit card companies to say, “I will not stand for this!” there will be an ‘Account Closed’ notation on your credit card. In addition to the account closing phenomenon, not monitoring your credit report can lead to other potentially harmful notations – erroneous or not – staying on your report and affecting your credit. And of course, if your credit report declines, your credit lines are likely to decrease in tandem. Many consumers are unaware of these potentially negative marks on their credit report, or are unaware of ways to get them cleared from their record.

Make sure that if there are any notations on your account, that you process a claim with your bank and with the credit reporting agencies to get these removed. Even if you have made mistakes, you can request an explanation of your errors in writing. If a bank fails to provide this evidence, then the law says it will be removed from your report.