COVID Credit Warning

The COVID-19 pandemic is causing physical, psychological, and financial problems for individuals and families around the world.  Financially, those stresses are being exacerbated by credit card companies lowering lines of credit and even cancelling cards without warning.

It is hard enough to have a loss in your income. I was there myself in 2013, and it’s one of the scariest experiences I’ve had in my life.  It gets worse as you begin to experience the aftereffects of that income loss on your credit because damaged credit will haunt you for a long time to come.  It is also tough to experience an impact on your credit when you haven’t lost income, but the financial world around you is in a state of unknowing.  That is also happening as a result of COVID-19.

Credit card companies always check the levels of risk in approving credit limits and interest rates.  In a time of financial crisis, one of the first things credit card companies will do is decrease a customer’s credit limit.  Why?  It’s simple.  The less credit they allow people, the less risk the company has if someone can’t pay their bills.

During great financial times, companies throw credit offers at people and raise credit limits left and right.  So, naturally, it is the opposite during tough financial times, like right now.  Credit card companies know that people have lost jobs during this pandemic, so they assess the risk of each of their customer’s ability to pay their debts and drop credit limits of customers they feel are currently more at risk.  Sometimes they even drop credit limits of people who are perfectly fine financially right now.

One of the scariest things about what these companies do is that the legally don’t have to tell you!  Legally, credit card companies only have to tell you if they’re changing your interest rate.  If they’re changing your credit limit (increasing or decreasing), they have no legal obligation to tell you.  They likely won’t tell you either because it is happening to so many of their customers that it would take too much extra time, energy, and money to notify customers and answer questions. So, they just don’t say anything.

The result of these lowered credit limits is that it will likely result in a lowering of your credit score as well.  So, how can you know and what can you do to protect your credit should a company lower your limit?

When it comes to finding out if your credit has been lowered, technology is your friend.  Apps like Mint or NerdWallet can be set up to notify you anytime anything happens with your credit.

I recently experienced this as a user of both Mint and NerdWallet.  My accounts are linked to my credit and to my creditors.  Three weeks ago, I got a notification from both apps that a large hardware store had just closed the credit card I had held with them for a decade.  It’s important to know that I am one of the lucky people who has been able to keep working and earning an income through the pandemic and I have a credit score of 800.  I had been planning on using the now cancelled card to get a big discount on an order when I got the notification.  So, why did they cancel my card?  I found out that it was just because I was on their list of customers who either got dropped or lowered credit limits.  If I had not received the notification, it would have been irritating when I tried to make my purchase.  Instead, Mint notified me and I ordered from a different store.

It was definitely annoying, but others are experiencing even worse.

There are many people experiencing job loss and waiting for unemployment pay to kick in.  In the meantime, there are bills to pay.  Many times, there are more bills to pay than money to pay them.  As a last resort, people opt to pay utilities, insurance, car loan, and more with a credit card.  It is only when they go to make the payment that they find out the credit card company dropped their credit limit and they are now maxed out with more bills that need paid.

Now what?

The advice I always give is to call the credit card company.  Don’t be afraid to make the call.  It can seem intimidating at times, but you are the customer.  Yes, you owe them a debt, but without your debt (and your payments), they have one less customer for their business.  Call them.  Politely ask why your credit limit was lowered, or if your card was closed, ask why.  Once you get the explanation, ask if they can return to your original limit or restore your card if it was cancelled.

They will likely ask some questions about your income situation.  I always advise being honest no matter your status.  Just ask what they can do to help you right now.  Sometimes they can help and sometimes they can’t help.

Unfortunately, there will be times when you have to explore other options to pay those bills.

As for your credit score, lowered credit limits can hurt your credit scores.

Even though it is the card company’s choice to lower people’s credit limits, the three credit bureaus (Experian, Equifax, and TransUnion) do not take that into consideration when scores are calculated.

Let’s take a look at how our credit limit ratio works.

In this example, you have a credit card with a $3,000 credit limit.  You currently have $600 charged to that card, which equals about 20% of the credit limit.  That is a safe ratio and will actually boost your credit score because it shows responsible credit usage as long as you pay on time.

Now let’s say that the card company just dropped your credit limit to $1,500 because of the current state of the economy.  This is no fault of yours, but that drop just damaged your credit.  You still have $600 charged to the card, but your limit was cut in half so you are now using 40% of the credit limit.  To the three credit bureaus, that’s starting to look irresponsible even through it wasn’t your fault and it wasn’t your choice.

It doesn’t matter.  I’ve always said credit is a game that we have to learn how to play.

Any credit card or department store charge card you have that you are using more than 30% of your credit limit will result in your credit score dropping.  If you are using more than 40% of your credit limit, your score drops even faster.  If you are over your credit limit by 50% or more, you would be shocked at how quickly those credit scores plummet.

That’s the game.  Learn to play it your way and things will look good.  If you keep your head in the sand by not understanding how credit scores work, you will inevitably lose…sometimes, at no fault of your own.

If you have questions about any of this, please reach out to me.  If I don’t immediately have an answer for you, I’ll consult with my team and we will help you find a path that works for you.

Stay safe and know that Pathfinder Services is always here for you!