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Household debt: Will your credit line disappear?

Credit card issuers are cutting back on the credit line they offer to even their best customers. Cardholders will need to keep abreast of changes in terms so they can act wisely.

The global credit crunch has started to strike where it hurts: consumers’ wallets, said Anna Maria Andriotis in The Wall Street Journal. Once generous credit limits are already being scaled back by card issuers with too much bad debt on their hands. Even people with low balances and outstanding credit scores may not be safe. Lower limits “spell trouble for consumers on several fronts.” For starters, a lower limit can push you over the top more quickly and “trigger” costly over-limit fees and higher interest rates. Keep a close eye on communications from your creditors. Issuers are required to let cardholders know when they change a limit, but they may bury that bad news in fine print. “Review your monthly statement for changes, including a lower credit limit, interest-rate spikes, and new penalties.”

You might be surprised what criteria card issuers consider when they cut back, said Kiplinger’s Personal Finance. They don’t only look at credit scores and outstanding balances, for instance. They also care where you live: Some issuers are tightening purse strings on consumers in the hardest-hit housing markets. Others are monitoring spending patterns or making judgment calls about job stability. “American Express says it’s reducing credit lines for cardholders at greatest risk—including small businesses in the construction, home-building, and mortgage industries.” The best way to maximize your chances of avoiding the ax? Besides paying your bills on time, try to keep your balance below 25 percent of your credit limit.

Left unchecked, lower credit limits can have a domino effect on your finances, said Jessica Dickler in CNNmoney.com. A “key component of credit scores” is the ratio of how much consumers spend each month relative to their credit limits. If your issuer puts a stranglehold on available credit, and you don’t start spending less or paying more, that ratio will “immediately” spike upward—which can lower your creditworthiness in the eyes of other lenders. For that reason, now is actually not a good time to close old credit cards that you rarely use. Though it may seem counterintuitive, they can actually help your credit score, since they indicate that you don’t typically use all the credit you’re extended.

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