Your finances

If you have not had the credit limit cut on your credit card recently, count yourself lucky. Risk-averse card issuers are getting slash happy. And while many cardholders gripe that such cuts slice razor-close to their balance amounts, for an unfortunate few the cuts go far deeper: below what they currently owe.

Under different circumstances, Barry Jones * would not have minded that the bank cut his unlimited credit line to just R25, 000. Except that when the bank reduced his line in February, he had an outstanding balance of R30, 000. “I found out by having a business purchase declined,” he says. Repeated calls to the bank failed to yield an answer about why the cut was made. Jones, who lives in Johannesburg, is now paying the balance under his regular card terms, and presumes the line will free up for new purchases once he’s below the limit. “For now, they’ve essentially frozen the account,” he says, leaving him to juggle business expenses on his personal cards.

Nasty as it may be, the practice of cutting credit lines below the balance is legal — at least, for now, says Chi Chi Wu, a staff attorney for the National Consumer Law Center, a consumer advocacy group. Federal Reserve rules requiring lenders to give cardholders 45 days notice before reducing a credit line to the point that it would trigger penalties which went into effect from July 2010. “[Until] then, there are no federal protections,” says Wu. (American Law)

The motivation among issuers to make such deep cuts that they plunge below a cardholder’s balance amount isn’t very clear. Usually, issuers cut credit lines to reduce outstanding liabilities — they sometimes may even chase the balance on riskier accounts with further limit cuts as cardholders pay down debts, but cutting below the balance does not reduce an issuer’s liability: The cardholder still owes the outstanding debt.

The banks declined to comment on individual cardholder accounts. But we believe that the banks has tightened its credit standards based on the economy, in an effort to reduce credit risk and refine strategies for their card business, they have tightened credit standards, reduced or canceled higher risk credit lines, and will close high risk accounts.

While the fees, frozen accounts, and default interest rates resulting from credit-line cuts can sting your finances, they can do some serious long-term damage to your credit score. Your credit utilization ratio — the total amount of debt you owe in relation to the amount of credit available to you — accounts for roughly 30% of your score.