Reduce Debt Faster

Well we have heard that it was coming, but it looks like many major credit card companies like American Express and Bank of America are slashing customers’ credit limits.

Even customers with good credit and who were far from maxing their credit cards out are being affected.  Officially, some creditors claim it is in preparation for the new credit card laws that will be enacted in 2010.

Hurting Credit Scores, Causing More Problems

Even if you no longer use your credit card or are just trying to pay it off, this will still negatively affect you if you carry a balance.  Let’s take a look at a very good friend of mine’s situation.

My friend, Forrest, had a Bank of America credit card that he has had since he was in college; he has been an account holder for over 10 years.  He has had a balance on it since college, but has been steadily paying it down over the past few years.

Forrest also has very good credit, his credit score was over 750 with one bureau and his lowest FICO score was 730.  In fact, Bank of America has steadily raised his credit limits over the years, with the lastest limit increase coming just 2 or 3 months ago!  It is important to note that Forrest never requested an increase, Bank of America simply granted based on his good credit.

Despite all of this, Forrest had his credit limit on this account reduced by more than 50 percent, leaving him with less than $1,000 left in available credit.

Now, Forrest was working on paying his account off anyway, so why should he care?  Well, this actually will HURT his credit!

Let’s say, for example, that he had a balance of $10,000 and that his credit limit was $20,000 before the reduction.  He was using only half or 50% of his available credit, which is not ideal but not too bad on his credit score.

Now, B of A cuts his limit to $11,000, so that he is now using $10,000 of his $11,000 in available credit, which is over 99 percent of his credit on this account.  With the changes, he now appears to be maxed on the account and could see a big drop in his credit score.

This could cause a whole host of problems for Forrest.  If he has other credit cards with balances, they could raise his interest rates or cut his limits as well in response to his worsening credit score.

He would also have a much harder time qualifying for any new credit accounts.  If he wanted to take out a loan or transfer his balance to a new credit card, he might not be able to do so anymore.

All of this, along with Chase’s recent raising of monthly payments, just goes to show how important it is to get out of credit card debt and to repair bad credit as soon as possible.