Trying to safeguard or even improve your credit during this challenging time? Don’t wait one more day to check your credit score. You just might get a surprise, like I did. And not a good surprise.
Let me explain.
Last week, I got an alert that one of my credit limits had been lowered on one of my accounts. Turns out that one of my creditors—a creditor with whom I have a perfect payment history on my 0% interest promotion, to be clear—had lowered my available credit.
I didn’t skip a payment, I wasn’t late, and my credit utilization—both with this creditor and overall—was pretty good. I’ve been aggressively paying off debts to improve my footing so I can refinance my mortgage and get rid of my private mortgage insurance, which is costing me about $180 a month.
This available credit lowering thing is apparently not an altogether uncommon event, and it can happen to you through no fault of your own. Yes, if you miss a payment, you may trigger a peek at your credit and a reevaluation of your terms. “The reasons can vary, but most are based on the fact that the creditor suddenly views you as an increased credit risk — or a high risk of defaulting on the card,” said Business Insider.
But, thanks to the Coronavirus and its impact on the economy and employment numbers, creditors are feeling panicky. And you could find yourself being affected by their anxiety for doing nothing wrong.
“As financial conditions worsen for millions of Americans, credit card companies are tightening the purse strings,” said CNBC. “In fact, some card issuers have already begun lowering credit limits—sometimes without notice—and more are expected to follow.”
Here’s the problem. This kind of action by a creditor can have a negative impact on your credit score. If you’re trying to boost your credit to take advantage of some of the lowest interest rates in history, this hit to your score is a big bummer.
Regardless, you need to check your credit right now. If you don’t have one of those credit monitoring services that makes you aware of every little change to your report, this is especially important.
How much will this hurt you?
If a creditor has lowered your available credit, it will hurt. “You’re cruising along with your favorite credit card when you get a notification that your credit limit’s been lowered. Say what? The above scenario happened to a friend of mine who had enjoyed the use of his credit card, made regular payments, was not over the limit, or ever late with a payment,” said Business Insider. “His credit score dropped 30 points.”
It isn’t so much the lowered available credit that affects you, but what it does to your credit utilization. “Lowering your credit limit can actually hurt your credit scores. The reason is that doing so increases your overall balance to limit ratio, or utilization rate,” said Experian. “The lower your utilization rate, the less risk you represent to lenders. An increase in your utilization rate is a sign of risk because analysis has shown that consumers with high utilization are often using credit to spend more than they make and are more likely to default if they take on even more debt.”
Will you recover—sure. Will you recover in time to refinance while rates are below 3%? Maybe not.
Do you have recourse?
Not really. You can call your creditor for an explanation and to ask if they’ll return the limit to where it was, but don’t be surprised to hear, “No.” Also, while this practice can feel punitive, it’s—unfortunately—perfectly legal.
“We knew the purge was going to come at some point, but it looks like it may have started,” Matt Schulz, chief credit analyst at LendingTree, told CNBC. “With most major changes to your credit card terms, issuers need to give advanced notice, but that’s not the case with credit limits, Schulz said. “For the most part, they are free to change those credit limits as they please.”