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Credit Card Red Flags May Lower Your Credit Limit

I was recently forwarded an American Marketplace show which reinforced something I’ve heard for a while now – credit card companies are watching your spending habits.

We normally think of credit cards as a revolving line of credit. (Actually, most people don’t know what that means…so I guess not, but they know the definition without knowing the term.) You get credit cards, you use them for whatever you want, you pay them off or don’t and incur whatever interest & fees you happen to incur and then you can use them all over again. They’re not like car loans or house loans, where the company pries into the exact details of what you’re buying and assesses you before it loans you the money. … Except that it does.

Credit card companies use automated programs to monitor the types of places you use the card–even if they can’t see what you buy. Go to a bar? Bad sign, maybe you’re worried about your job and using alcohol to cope. Get a massage? Bad sign, maybe you’re stressed at work. Shop at Aldi instead of Giant? Are finances tight? Use your credit card to buy groceries, toiletries, etc? Maybe you don’t have the cash for those things.

Credit limit suddenly drops.

Of course, credit card companies have a reason for monitoring and perhaps even for cutting your limit if you send up a number of red flags. They want to be paid and they have every right to be paid. It’s not actually your money.

What we’re seeing is the lenders playing a much more active role in the lending process instead of just giving laissez faire like we saw in good economic times. Instead of evaluating us for cards up front and periodically checking how we pay them off, they keep checking in on where the money is going and how that lines up with their risk assessment parameters. It’s like we’re applying for our cards & limits over and over again.

Ironically, the best customers for the companies are not the people with the best financial skills. Credit card companies prefer people who carry a balance, but they need the people to be able to make all their payments on time. Otherwise what they hypothetically earn in interest remains just that–hypothetical.

It’s a fine line that these companies are walking, especially since their most profitable customers are riskier bets than they used to be. It only makes sense that they’d use the data from the card to keep closer eyes on the accounts.

What can you do to avoid credit card red flags?

Well, you can give up using credit cards entirely–but if they close your account it may have a bad effect on your credit score. Having a good credit score pays off if you do have to take out loans later on, since you’ll pay less in interest.

A more practical solution is using your debit card or cash if the business you’re patronizing might send up a red flag. Buying drinks at a restaurant looks like eating out, buying drinks at a pub looks like drinking. On the other hand, renting a video should be a tamer activity. Same with going to the movies or buying coffee. Or you can limit your use to a few purchases every month to keep the card active, pay them off promptly, and use debit & cash for everything else.

You shouldn’t be spending money you don’t have anyway, so this may cause a loss of reward points but that’s about it. For most people, reward points are likely to be a thing of the past for the next decade anyway.

If you’re truly dependent on credit cards for meeting your basic needs, then you have more to worry about than just getting your credit limit cut. That would be bad, but it wouldn’t be the only bad thing.

What if these red flags lower your credit limit despite your financial situation staying stable?

Call the credit card company and ask to have it raised again. It’s likely the CSR you get won’t be able to do that for you, but their supervisor may be. To increase your chances keep these things in mind:

  • The CSR & supervisor are not personally responsible for the drop, be friendly.
  • You are never entitled to a line of credit, or a higher credit limit. What you are is a good credit risk (or not). Don’t take the entitlement approach, persuade them you’re still good for the company.
  • You can try again. If you don’t seem like a good risk right now to whatever system the company has in place, you can try again in the future. Perhaps a different month of spending, a different person interpreting the new data, and you look like a good risk again.

Has your credit card limit been cut in the last year? Do you know why? Has it affected you at all?

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Weekly Wisdom in Personal Finance - New Growth Edition | Debt Free Adventure!
July 18, 2009 at 4:46 pm


Dad July 13, 2009 at 10:20 am

It is good to remember that the card company is trying to protect its money. It is not you individually that they are doing it too. You don’t see the number of customers in financial trouble who are behind on their payments. Many of them were also good customers before. That’s due to the times we are in. Also the banks are not making moral judgements on your spending. They are looking for things that with other customers have meant the change of your not paying them has increased. Your situation may be different but you may need to use cash or debit cards to change what the company sees.

Funny about Money July 13, 2009 at 12:11 pm

Good article!

I’ve stopped using my AMEX card in Walmart. And I wouldn’t use it in a dollar store, a second-hand store, or any other downscale establishment. Instead, I use my Visa card. To charge gas at Costco you have to have an American Express card, and so I really don’t want to lose that. But the Visa card? Meh. I don’t use it much and so don’t care if they lower the ceiling. Anything I’d put on the Visa I could pay for in cash, anyway–so if Visa doesn’t like where I shop, the card can go away.

LOL! You’d expect a person who could afford to get a massage or drink at a bar would be a good credit risk. Wouldn’t you think they’d notice that people like me don’t get those things because we can’t afford to pay for them?

Funny about Money’s last blog post: Money happens…

Michael July 13, 2009 at 1:29 pm

Easiest way to not worry: apply for much less than your limit. Our limit is only a couple thousand dollars, so we can depend on its staying where it is.

We also have a fixed-rate card through a credit union. We have fewer problems resolving disputes.

Miranda July 13, 2009 at 1:45 pm

I heard that on NPR as well. The credit card companies look more and more like Big Brother daily. At any rate, I recently had one of my credit card limits cut. Which really annoyed me. Since I am (was) well below the limit, pay on time, and rarely buy anything using my credit cards.

Miranda’s last blog post: Personal Finance Advice to My Past Self

Aryn July 14, 2009 at 12:45 pm

I had the limit on one of my cards cut in half, but that took the rate from “absurdly high” to merely “really high.” It wasn’t on a card I regularly use, though. It got used a few times a year for little purchases, so they cut it. Our heavily used card has maintained its absurdly high limit.

Aryn’s last blog post: 5 Decisions to Make Before You Move

plonkee July 15, 2009 at 3:43 am

I bet they’re very interested in changes in consumption. If you regularly use your credit card in a bar, then it’s probably not as bad (from a credit card point of view) as suddenly starting to – that either suggests that you’ve taken up the drink, or you can no longer afford to pay in cash.

I’m experimenting with sticking to cash only (or almost only) for July and August. I’d prefer it if my credit card company didn’t lower my limit, but it wouldn’t be the end of the world.

plonkee’s last blog post: money isn’t the same in my head

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