Financial Elite's Readers Questions and Answers is Back in Action

Tuesday, August 10, 2010

Financial Elite's Readers Questions and Answers is Back in Action

It's been a while since I've been asked questions regarding credit and finance, but a new question popped up that inspired my to start up the reader questions and answers posts again. If you are experiencing the issues I am and want to know what I did in that situation or you just have a personal finance question in general, you can contact me at thefinancialelite@gmail.com and I'll see what I can do to answer them.

Why was my credit limit dropped on my credit card, when I pay my balance in full each month? Will this hurt my credit score?

-Michael

The economic crisis has given credit card companies the excuse to look for ways to reduce their risk anyway they can. You are not alone in this situation. I have many friends who have FICO credit scores as high 800 and have had their credit limits dropped. Since you pay your card in full each month the credit card companies decision probably had nothing to do with you personally, but they made the choice so they would have lower outstanding limits on their balance sheets.

If the balance you owe on your credit cards adds up to less than 10% to 20% of your remaining limits (that means all of your credit cards combined), you have no worries. Your credit score will stay intact. What may cause a problem is any limit cut to your lines of credit can cause your debt-to-credit limit to go up. If it pushes it over 25% it can cause a hit of 50 point or more to your FICO score. One option you might have is to apply for a new credit card. This in turn will give you more available credit and help reduce your debt-to-credit ratio. New credit can however, give your score a hit, but not as bad as an increased debt-to-credit ratio will.

Your other option is to just wait it out. One day things will get better and the banks will start raising their limits again. For me I am steering towards strictly using a debit card or paying cash for everything. Don't fall into the same trap I did with depending on credit to get by if something goes wrong and maxing out your cards. Keeping your high credit limits will keep your credit scores up there, but the temptation to use those credit lines can be lurking too. Since you pay your cards in full each month I am sure you wouldn't be tempted to charge up your new credit card, would you?

Do agree with my suggestion? Do you have something to add or maybe want to share your experiences? Leave a comment below and get involved.

[This post is written and copyrighted by Financial Elite (http://financialelite.blogspot.com/ ).]

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