By Melissa Lambarena
Increase available credit card balance while your accounts and economy are still in good shape – here’s how.
This article is reprinted with permission from NerdWallet.
Relying on a credit limit in a shaky economy is tantamount to expecting a weak bridge to weather a storm and sustain you.
It’s not uncommon for credit card issuers to minimize their risk by lowering credit limits or closing accounts when there is a possibility of economic distress. According to a 2022 Consumer Financial Protection Bureau report, credit card issuers took these actions during the 2007-09 recession and early COVID-19 pandemic, possibly due to changes in credit profiles, internal performance metrics, or shifts in issuers’ risk management policies .
Even as an uncertain option, a line of credit is still a bridge worth preserving to supplement or back up an emergency fund, especially ahead of a potential recession. There is no foolproof strategy to prevent an issuer from lowering credit limits or closing accounts, but some actions can minimize the impact on your wallet and credit score.
Keep credit cards open and active
In March and June 2020, many cardholder accounts, even those with high credit ratings, were closed for inactivity in the same year, according to a special issue of the CFPB. Dormant cards don’t bring the issuer money in the form of fees, so they pose a higher risk to the issuer in tough times.
It’s worth keeping credit cards open and charging scheduled purchases regularly to give issuers one less reason to touch your account, but that may not be enough.
It didn’t matter to Timothy Barnes, an auto mechanic from Rocky Mount, North Carolina, that he was still busy with active accounts in good standing at the end of 2020. A major issuer has closed several of its accounts and scrapped over $17,000 of available credit.
“It was one day when I bought something online and the credit card was declined,” says Barnes. “They said it was a risk, but I didn’t even miss a single payment.”
Previously, some lenders did not provide cardholders with reasons for reducing the credit limit. In May 2022, the CFPB Opinion on the Equal Credit Opportunity Act confirmed that lenders must provide an “adverse action notice” explaining the reasons for unfavorable decisions.
Also see: “Forget about chasing rewards and look for the lowest interest rate possible”: Credit card rates not near peak since 1996
Consider requesting a credit limit increase
Consider applying for a higher credit limit on commonly used credit cards if you pay on time and don’t use more than 30% of your available credit. Income is another factor issuers consider when increasing credit limits, says Derek Mazzarella, a chartered financial planner at Gateway Financial Partners, based in Glastonbury, Connecticut.
“If your income has increased since you last applied for the credit card, or you haven’t updated it in a while, I would make sure your income is actually updated,” says Mazzarella.
Some issuers allow you to update your income by logging into your account and they use this information to increase the credit limit without requiring an inquiry. Depending on the issuer, credit scores may temporarily drop when you apply for a raise. Therefore, ask beforehand how the credit rating is affected.
One of the most important factors in creditworthiness is utilization, or how much credit you have available compared to your usage. Increasing the credit limit can increase available credit and help build creditworthiness. The opposite is true when a credit card issuer later hacks a credit limit – the results are hit. An issuer’s reductions can even affect the limits of other credit cards.
Increasing the credit limit can mitigate the impact of a future reduction, but does not protect against account closure, which can also cause scores to drop.
“My credit has changed quite a bit since then, but before that it was exceptional,” says Barnes.
Weigh the potential pros and cons when applying for funding in the near future to determine the best course.
Check out: You work hard to pay off debts. Here’s the surprising secret that will keep you from hitting back when the economy slows
Diversify credit limits
Barnes kept multiple credit card accounts with one issuer because of convenience. Luckily, he also had an emergency fund and a few other credit cards that weathered the economic storm of 2020.
Consider building other bridges by opening a credit card with another institution if you don’t already have one. If you tend to overspend, stick to a lower credit limit to curb spending, Mazzarella says.
A new card application may cause your credit rating to drop temporarily, but probably not as much as a credit limit reduction. For flexible spending, look for a universal credit card that is accepted by most retailers.
See also: 5 ways your credit cards can help you fight the pain of inflation
Strategically manage credit limits
Use your available balance wisely to keep it manageable. If possible, keep finances under control by:
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Melissa Lambarena writes for NerdWallet. Email: [email protected] Twitter: @LissaLambarena.
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