Relying on credit lines in a volatile economy is like hoping a fragile bridge will weather the storm and survive.
It is not uncommon for credit card issuers to reduce credit limits or close accounts to minimize risk in the face of potential financial difficulties. Credit card issuers took these steps during the Great Recession and early in his COVID-19 pandemic, according to his 2022 report from the Consumer Financial Protection Agency. This was likely due to changes in credit profiles, internal account performance metrics, or changes in the issuer’s risk management. policy.
As an uncertain option, credit limits are a worthwhile bridge to maintain to supplement or back up emergency funds, especially before a potential economic downturn. While there is no foolproof strategy to prevent you from getting ripped off, some actions can minimize the impact on your wallet and credit score.
Keep your credit card open and active
In March and June 2020, many accounts owned by cardholders were closed due to inactivity, even accounts with high credit scores. Inactive cards pose more risk to issuers in difficult times because they are not profitable in fees.
While having your credit card open and regularly charged for planned purchases is worth one less reason for your card issuer to access your account, it may not be enough. .
For Timothy Burns, an auto mechanic based in Rocky Mount, N.C., it didn’t matter that he was still employed and had a valid account in good standing in late 2020. A major issuer closed several of his accounts and in available credit he scrapped more than $17,000.
“I bought something online one day and my credit card was declined,” says Barnes. “I was told there was a risk, but I never missed a payment.”
Previously, some lenders did not provide cardholders with a reason for lowering their credit limit. In May 2022, his CFPB advisory opinion on the Equal Credit Opportunity Act confirmed that lenders must provide a “adverse action notice” explaining the reasons for the adverse decision.
Consider applying for a credit limit increase
If you’re paying your bills on time and don’t exceed 30% of your available credit, consider increasing the credit limit of a frequently used credit card. Income is another factor issuers consider when it comes to raising credit limits, said Derek Mazzarella, a certified financial planner at Gateway Financial Partners based in Glastonbury, Connecticut.
“If your income has increased since you last applied for a credit card, or if you haven’t renewed in a while, make sure your income is actually renewed,” says Mazzarella.
Some issuers allow you to log into your account to update your income and use that information to increase your credit limit. No request required. Depending on the issuer, requesting an increase may temporarily lower your credit score. Before doing so, find out what the impact will be on your credits.
One of the biggest factors in your credit score is your utilization rate, the amount of credits available compared to your usage. Increasing your credit limit increases your available credit and helps build your credit score. Conversely, if your credit card issuer later hacks your credit limit, your score will suffer. One card issuer’s discount may even spill over to other credit card limits.
A higher credit limit may lessen the impact of future cuts, but it won’t prevent account closures and may also result in a lower score.
“My credit changed quite a bit after they did that, but before that it was exceptional,” Barnes says.
If you are applying for funding in the near future, weigh the potential pros and cons to determine the best course of action.
Diversification of credit limits
Barnes had multiple credit card accounts with one issuer for convenience. Thankfully, he had an emergency fund and a few credit cards to weather the 2020 economic storm.
If you don’t have a credit card yet, consider opening a credit card with another institution to build another bridge. If you tend to overspend, set a lower credit limit to keep your spending in check, Mazzarella said.
Applying for a new card may temporarily lower your credit score, but not as much as lowering your credit limit. For flexible spending, look for general-purpose credit cards accepted by most merchants.
Strategically manage credit limits
Use your available credits judiciously to keep things manageable. If possible, manage your finances by:
– Manage your current credit card responsibly before opening another one.
– Allow at least six months between credit card applications to reduce the impact on your credit score.
– Using less than 30% of available credits.
– Payment over minimum hours.
– Have an emergency fund so you don’t rely on your credit card.
– Create a plan to pay off large purchases before adding them to your card balance.
– Ask your credit card issuer to keep your credit limit or account open if the credit card issuer takes action.
By MELISSA LAMBARENA for NerdWallet