Credit limits reduced during COVID-19 crisis
Credit card issuers reduce their risk by lowering credit limits.
Millions of Americans rely on credit card Of course, and right now, a large number of consumers are relying on their cards to get through the COVID-19 crisis. Building up a balance is far from ideal, but for those who are out of work and don’t have enough income to pay their bills, it can be a way to cover the essentials.
But the option to continue charging and charging may soon be out of the question. The reason? U.S. credit card companies may soon start lowering customer credit limits in an attempt to minimize their own risk. Discover Financial Services said in late April that it was already limiting credit limits for new customers. And Wells Fargo will periodically review all accounts and adjust credit limits as needed.
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The problem with lower credit limits
A lower credit card limit means you can’t charge that much on your credit card – that’s obvious. But it could also be catastrophic if you use your credit card as a financial lifeline during the pandemic.
However, this is not the only downside to a lower credit limit. When this limit drops, your credit utilization rate may increase, which could adversely affect your credit score. Your credit usage rate is a measure of the available revolving credit you’re using, and you’ll need to keep that percentage at 30% or less to avoid negatively impacting your score. This means that if you have a total credit limit of $ 3,000, you should keep your credit card balance at $ 900 or less to prevent your credit rating.
Now let’s say you’ve already billed $ 900 this month except your credit limit is lowered to $ 2,500. So you’re looking at a 36% usage rate, which is bad for your score.
What to do if your credit limit is reduced
If your credit card limit has gone down and you are concerned that a lower limit will hurt you financially, your first step should be to contact your credit card issuer and request that your original limit be restored. . If you are a long-time customer in good standing and have already made your payments on time, your issuer may agree to reinstate the limit you were granted prior to the novel. coronavirus pandemic.
If not, you can apply for another credit card or request a credit limit increase on another card you already have. Applying for a new credit card may have a low impact on your credit score since the financial institution serious investigation on your credit report. But that ding should be minor, and it’s likely to be far less substantial than the hit your credit score might take if your usage rate goes too high.
Another option you might want to consider is to split your minimum credit card payment into two payments: one in the middle of the cycle and one at the end of each month. This will save you money on interest while lowering your usage rate.
If all else fails, reserve your existing credit limit for essentials that need to be paid for immediately, like food, and ask your other billers for some leeway. For example, you can normally use your credit card to pay your Internet bill, but your Internet service provider might be willing to allow you to defer certain payments for a period of time. If this happens, be sure to withdraw or stop any automatic payments or recurring bills you have set up on this card.
A lower credit card limit is a good thing in some ways – it ensures that you won’t accumulate debt that you can’t pay off. But in times of crisis, it could be financially devastating to lose some of that leeway. If your credit card limit is unexpectedly lowered, feel free to contact your issuer and politely but firmly challenge that decision. At the same time, you have to recognize that many financial institutions are very cautious at the moment due to the precarious state of the economy.
Once things stabilize, there’s a good chance credit card issuers will be more generous with the spending limits they approve, so for now you may just have to sit back and weather the storm.