Will Your Credit Card Limits be Cut Back?

Consumers should be on the lookout for notices from credit card companies. They may look like junk mail, but the information inside may be anything but-it could describe the new terms of your card. With consumer credit already stretched to the max, many Americans may find that their plastic limits are shrinking, even as interest rates rise.

People who carry credit cards are now getting hit in the wallet by the growing consumer credit crisis.  Even cardholders with good track records and decent credit scores are seeing their credit card limits curtailed. Outstanding balances and FICO scores are still the main way that rates and limits are determined.  But now, it's also possible to have the terms of your credit card altered because of where you live, or how stable your particular job happens to be.

At-risk borrowers

As reported in The Week news magazine, for example, American Express is reducing credit lines for cardholders "at greatest risk." That means that consumers in the construction industry, home-building trade, or mortgage brokerage business could have their credit lines cut.

Kiplinger's Personal Finance says that credit card issuers are also reducing credit for those customers who live in the hardest-hit housing markets. This should come as no surprise, because major banks began doing that same thing months ago by shrinking lines of credit on home equity loan products.

Major credit card companies are also notifying members that credit card rates may go up across the board, despite the fact that the Fed has been severely slashing interest rates.  The rates at American Express, for instance, are expected to rise by as much as two full percentage points.

Hit on your credit rating

When credit card limits fall, the ratio of a cardholder's debt to credit rises.  That can trigger a domino effect of other adverse reactions. Having less credit can mean that it's easier to trigger over-the-limit charges and penalties, including large surges in interest rates.

Credit agencies also look at what percentage of your credit is being used. Having lower credit card limits automatically means that the cardholder is using a greater percentage of available credit.  That can potentially cause a lower credit score, which will have a negative impact on all types of loans.

According to the Federal Reserve, a significant majority of banks have tightened their lending standards this year.  Therefore, cardholders need to be extra vigilant to protect the credit card rates and limits on their precious, but precarious, plastic. People who carry credit card debt should keep a watchful eye on changes, and carefully read any notifications that card companies send through the mail. Try to maintain balances that don't exceed 20 or 25 percent of your total credit limit, because that shows an ability to manage money and not overspend. With a card limit of $2,000, for example, cardholders should not run balances over $500-a task that may be difficult to do during holiday shopping sprees.