Borrowing money has become difficult under the dark cloud of the global credit crunch. Nearly 30% of credit companies have tightened their requirements for credit card applicants. Even if you haven't felt the result of the subprime mortgage crisis yet, your credit score can take a hit. Trying to reduce their risk and preserve capital, some credit card issuers are lowering credit limits of their customers even if they have done nothing wrong.
When a credit company grants you credit, they also set you a credit limit - the maximum amount of money you can borrow. Its amount depends on your previous credit card usage, payment pattern, income and other factors. If you have proved to be a reliable and trustworthy customer, your credit limit will be higher than the credit limit of applicants with bad or no credit.
Typically, most people want to get a high credit limit because it can be a great advantage. It will give you flexibility for purchases and a lot of spending power. However, if you were lucky to get a sufficient credit limit, it doesn't mean that it will remain high for the whole life of your credit account. Even if you always make on time payments and don't spend more than you can afford, credit card issuers can change your credit limit in the wake of the credit crisis.
According to the results of a new Internet poll, 11% of participants said that their credit limits were lowered in the past six months. By doing that their banks tried to reduce their risk and preserve capital.
Some experts say that there is nothing new about credit card issuers reviewing customer accounts and raising or lowering limits. Current economic environment is certainly influencing bank behavior. Lowering limits is better than to triple the interest rates.
However, many people don't agree with this point of view because lower limits can lead to credit score drop. The reason is the following. A key component of credit score calculations is the debt/available credit ratio, also called the "utilization ratio". The credit bureaus calculate the percentage between your credit cards balance and your total available credit. When the amount of your available credit is low, it means that you are close to maxing out your credit cards. That can make your credit score go down.
Credit score is used to make important decisions concerning your ability to qualify for a credit card, rent an apartment and even get a job. Bad credit scores can cost you a fortune in the long run because they are always associated with the lack of financial responsibility. That's why you will definitely want to have as many points as possible.
Fortunately, the credit score is a flexible number. It can go up if you apply well-considered financial strategy. Try to keep your debt less than 30% of your available credit, control your spending, plan your purchases in advance and make regular timely payments. Thus you can build a solid credit history that will be your best recommendation for future loans.