Friday, January 30, 2009

Economic Crisis Hits the Credit Card Industry

Have you recently had your credit card limit reduced or even had a credit card cancelled for no apparent reason? If so, you are not alone. In fact, according to a survey of senior loan officers conducted by the Federal Reserve in October, approximately 20% of banks had reduced the credit limits of their prime borrows while 60% had lowered the limits of their nonprime borrowers. Unfortunately, slashing your credit limit may have a worse impact on you and your finances than you originally thought.

Why Banks are Cutting Credit Limits

Thanks to our troubled economy, many banks are choosing to cut credit limits in an effort to reduce their financial risks. Since the current economic problems are causing an increase in consumer defaults on loans, credit card companies are closing inactive accounts and reducing the amount of money consumers can borrow. Unfortunately, the reduction in credit limits has only managed to worsen the current economic climate as consumers turn to other sources for paying their debts or simply stop paying on them altogether.

The Unexpected Negative Effects

Obviously, cutting credit limits and closing credit card accounts is bound to leave many consumers in a poor financial situation. In addition to reducing the funds that are available to them, however, cutting credit card limits and closing credit card accounts also has a negative effect on consumer credit scores.

According to experts, approximately 30% of your credit rating is determined by your credit to debt ratio. In other words, the more debt you have in comparison to the amount of credit you have available, the worse your credit score becomes. When a credit card cuts your credit limit down, this reduces the total amount of credit you have available. Since you are still carrying the same amount of debt, your credit to debt ratio looks far worse than it did before the credit line cut.

Those consumers whose credit cards are cancelled are also losing out on valuable credit history, as those credit cards are effectively dropped from their credit reports and no longer count toward their credit rating. Depending upon how long you have held the credit card and depending upon the other forms of credit you have in place, having a credit card cancelled can also be quite devastating in terms of your credit rating.

A Vicious Cycle

Unfortunately, cutting credit card limits and canceling credit cards has spurred a vicious cycle. As consumer credit ratings are negatively impacted by the credit card changes, they find it more difficult to obtain the loans they need to make it through these troubled times. In addition, as other credit card companies take a look at their credit reports, the recent changes can make them view the consumer as a high risk as well.

So, what can you do about it? Unfortunately, there isn’t a whole lot you can do other than wait it out. If you are concerned about having a card cancelled on you, however, you can make an effort to use it at least once per month so the credit card company will be less inclined to cancel a card that has not been getting any use.

About the Author: Shannon Kietzman is a well known author and trusted resource. Shannon regularly writes for . For more info and to order your credit report with FREE credit score please visit

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