In order to minimize their losses, a great number of credit card companies are not only refusing to extend credit to new borrowers but are also taking a close look at the accounts they already hold. As a result, hundreds of people are receiving letters from their credit card companies informing them that they will be reducing their credit limits.
Why are Credit Companies Reducing Limits? Most credit card companies are trying to take a proactive approach to the increased unemployment rates and the number of defaulted payments they are seeing. They know that those who are unemployed or underemployed will use their credit cards to supplement their incomes despite the fact that they no longer have the money to make regular monthly payments.
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There are a number of other reasons, aside from the current economy and unemployment percentages, that may contribute to your current credit rate being cut. These include:
Frequently bouncing checks to your lender or other sources; Making late payments; Collecting unemployment, which signals to your creditors that you may be having financial problems; and Defaulting on other credit accounts.
Some credit card companies are cutting spending limits on good accounts as well. They're looking at individuals who run low balances or who do not frequently use their cards and are cutting their limits, too. Despite the fact that having a low balance and not over using credit is supposed to be good for building your credit score, credit card companies have taken the opportunity to cut back on their liabilities by limiting these people as well.
Why Does a Lower Credit Limit Matter? While it may not seem like a big deal at the time, one of the major factors that determines your credit rating is your debt-to-credit ratio, not to be confused with your debt-to-income ratio. Your debt-to-credit ratio shows how much money you could borrow versus how much money you are borrowing. The lower this number, the better your credit score. If you have a balance on your account and your lender suddenly lowers your available credit limit your debt-to-credit ratio will automatically rise, potentially harming your credit score.
Should I Consider Bankruptcy? The fact that you have received a credit limit reduction doesn't necessarily mean you should consider bankruptcy. If, however, your credit reduction means you won't have any cash flow available to pay bills or buy groceries you may need to step back and seriously reconsider your financial situation. Contact a local bankruptcy attorney to discuss your personal financial situation and to explore the financial alternatives that may be available to help remedy your personal situation.
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