Credit line decreases can hurt your score

NEW YORK (8/6/07)--In the past, credit line increases have given consumers a headache, but now credit line decreases are causing just as much frustration (smartmoney.com July 26).

When lenders reduce credit limits, your total debt utilization ratio--the ratio of credit in use to total credit available--increases, which causes your credit score to drop. And, if your credit limit drops before you realize it and you try to make a purchase, you could be slapped with an overdraft fee or denied credit.

There isn't a clear reason for the sudden surge in credit line decreases. If creditors perceive that you're at higher risk of default--that is, when you're close to (or in) debt trouble--they're more likely to decrease your credit line. The actual triggers for reducing credit lines, however, are unknown.

Here are some tips from Smartmoney.com to help you avoid the pitfalls of a decreased credit limit:

* Check accounts online regularly. You will notice credit limit decreases much faster if you monitor card activity online. Creditors must notify you by mail whenever your credit card terms change, but it can take time for notification to reach you.

Keep a card or two with low or no balances. That way, if your limit is decreased on one card, your debt utilization ratio doesn't skyrocket.

Stay out of credit card debt trouble. Credit card companies are most likely to reduce the credit limits of higher-risk customers. Avoid making late payments or applying for too much credit. As a general rule, anything that could drop your credit score could also make you vulnerable to a credit limit decrease.

For more information, read "Online Banking Makes Money Management Simple and Safe" in Home & Family Finance Resource Center.