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Credit Cards: How to Protect Your Limits

To lower their overall default risk and protect profits, some card issuers may reduce your credit limit. Here are tips for keeping it steady

As big banks such as Wachovia (WB), Citigroup (C) and Bank of America (BAC) continue to post multimillion-dollar writedowns to cover mortgage loan losses and other bad investments, credit-card holders are increasingly getting squeezed. Card issuers such as American Express (AXP) have started taking a closer look at the math that determines how much credit is available to each customer, and some are cutting their credit lines to keep more money in house.

That's because credit-card issuers want to keep default rates as low as possible to protect their profits. American Express has begun looking at where certain clients live and whether their jobs are affected by the weak economy to gauge its default risks, says Molly Faust, vice-president of public affairs and communications at AmEx. "There has been more targeted risk in certain segments," Faust says. That risk is greatest in areas that have been hit hard by the real estate slump—namely California, Nevada, and Florida.

Even with the credit crunch and tighter lending standards, issuers have not had to lower credit limits across the board. Issuers use lower limits to warn consumers they are on the road to financial ruin, says John Hall, a spokesman for the American Bankers Assn. "Credit-card issuers only lower limits to help their customers," Hall says. "No one wants to see a default."

Read the Fine Print

Credit-card companies retain the right to change the terms of their agreements, particularly if a customer defaults. Nessa Feddis, senior federal counsel for the American Bankers Assn., says that by law, issuers must inform cardholders of any changes to their account.

The problem is that while most consumers receive the notices as part of their monthly statement, many cardholders focus on the payment portion and either ignore or discard the message inside. Consumer advocates recommend consumers read all the fine print in their statements and in letters from credit-card companies. Failure to respond to a notice can result in hundreds or even thousands of dollars being deducted from your credit line and can shave points off your credit score. And it could cause some embarrassment when you don't have enough on your card to cover a purchase.

Consumer advocates argue that the issuers' seemingly abrupt credit limitations can unnecessarily cut off consumers' spending power. "The law allows companies to change the terms without prior notice," says Linda Sherry, an advocate in Washington for San Francisco-based Consumer Action. And, by changing those terms without looking at the customer's circumstances, credit-card companies are freezing customers' access to credit they had been awarded.

Dos and Don'ts

Here are some steps consumers can take to keep their credit limits from being reduced.

First and foremost: Pay your credit-card bill on time. According to Loretta Abrams, senior vice-president of consumer affairs at HSBC (HBC), 35% of your credit score is determined by whether or not you meet your payments when they are due. Consistent late payments can cause hundreds of dollars in late fees and sink your credit score.

Second: Always pay more than the minimum requirement. Although it seems like easy free money, credit cards are actually short-term loans that often have steep monthly interest charges. Repay as much as you can quickly to get that loan off your books.

Third: Don't make a habit of shopping for credit cards. Customers should always be on the lookout for lower rates. But credit issuers keep a sharp eye out for risky behavior. And applying for multiple credit cards can raise some eyebrows—three or more inquiries for new cards in one month can lower your credit score. Having one card is optimal—two or three is acceptable. But you want to stay away from a full deck.

Fourth: Don't max out a credit card, and keep as much of your credit line as free as you can. Cardholders should never use more than 50% of their available credit, even when money is tight. These days, appearing fiscally irresponsible can lower your credit limit. Living off of a credit card or using it as a primary source of cash can push you closer to the max, and issuers will be sure to step in and reduce your allowance.

Winfield is a reporter for BusinessWeek.

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