Here’s the situation: I have a fairly low credit rating, despite always making payments on time. The reason is because my credit utilization rate is fairly high. About two years ago, I had a few cards that were nearly maxed out. At that point I pretty much stopped using them and began paying them off. I figured that I could lower my balance and, as my balance lowered, so would my credit utilization rate and my credit rating would go up.
Sadly that’s not what’s happened.
What has happened is as follows: I take $1000 of the balance of Card A. Card A runs a check, sees I still have a high utilization rate (because of the other cards) and so, they cut my limit by $1000. Then card B does the same. And so does C. And on and on it goes. Since they’re cutting my credit by (more or less) the amount I pay off (which, I know, is a good thing in and of itself), I can never seem to get my credit rating up, since my utilization rate stays at close to 100%.
Any suggestions on how to break out of this cycle?
Look for additional cards that will approve you. I’d avoid anything with an annual fee, but even if you have to take a 25% interest rate, you can hold onto the card and not use it. That will help to keep the utilization rate lower.
Have you looked at your actual credit report, though? Usually, companies need something worse than high utilization to get you down and keep you there. There could be unpaid bills on there that you forgot about, or bills or cards taken out in your name as part of identify fraud.
Also, try talking to the card companies. You’d be surprised what they will do if you ask. One client had the same problem you had. When he called a company about it, they raised his limit to higher than it had been before they reduced it. I know other people who called to ask for a reduction in interest rates and it was granted without any debate. If you do have a strong payment history and a carried balance, you should have some negotiating power.
In case anyone doesn’t know, the credit agencies are required by law to give you a free copy of your credit report once a year. Here’s a website where you can request copies:
Well, IMO, number one thing to worry about is not your credit score, it’s paying off the credit cards as soon as possible. You’re certainly paying huge amounts of interest on them, and the single best financial move you can make is paying off as much as-- or more than-- you can afford as quickly as you can.
Why do you care what your ‘credit rating’ is, anyway?
I think the OP’s main concern is that the credit limits are being dropped to correspond with his payoffs. Thus while he keeps making payments, the available credit is always at or close to zero. He’d like to continue paying off the cards and still have some credit available.
I think what you need to do is make the minimum payments on all but one card, and focus your energy on paying off one card at a time. As was said upthread, beyond a certain threshhold, they are not going to reduce your limit. So once you pay off a card, you will still have, say a $2000 limit but no utilization on that card. Repeat as necessary with the other cards.
Also, definitely call some of the cards to see if they will give you a break and up the credit limit again. They probably are just trying to limit their exposure, as most places are, to defaults by making sure you can’t run the charges back up now that you have space on the account.
Use your credit card for everything you possibly can. Send in multiple payments a month. Since you are putting on the credit card what you used to pay cash for you should be able to pay that part off. The sheer amount of activity will move things along.
If you are a credit union member obtain a credit union loan, often at a substantially reduced interest rate than what the cards offer, and pay off the credit card debt with the loan once and for all. Cut up the cards and make no effort to get new cards until the credit union loan is paid off.
By obtaining the loan to pay off the cards, you gain an immediate benefit in loan interest rates, the credit card companies won’t be getting their pound of flesh, your credit rating will improve and you should be at the beginning of getting a handle on your finances.
The ultimate key is you must break the cycle and deal with some pain head on. That takes discipline. Are you up to it?
This is one strategy. Another is to tackle things from the smallest balance due to the highest. As you pay off one balance, you apply what you were paying to it to the next one you can tackle, then roll both into the third, and so on.
The theory behind this approach is that the majority of people will feel more excited to maintain a regular plan of payoffs if they’re seeing consistent progress, like watching a $1,000 balance drop by $100 every month and being paid off within a year rather than the 6.5 years it would take if only paying minimum payments.
The notion is called the debt snowball, advocated by radio money guy Dave Ramsey. His show and his books are interspersed with some Christian theology, but his financial ideas are sound. There are several calculators available online to figure out how to budget to attack your debt in this way.
Close you cards and your rating will **tank. ** Keep the cards open and pay them off with a consolidation loan. I work for a credit reporting agency. I’ve worked on scoring models.
No, they are trying to screw more money out of their customers.
Many card agreements have been changed to allow them to keep charging you a higher interest rate if your credit utilization rate is high, even if your actual balance is low, and being paid on time.
So by lowering your credit limit, it ups your utilization rate, which triggers the clause allowing them to bump up your interest rate. Bingo, more profit!
Have the credit line reductions been happening within the last few months? Banks are reducing the available credit on many customers, especially those with lower credit scores. Their official reason is that they believe the customers with a lower credit rating are less likely to be able to pay their bills. If they suffer a job loss, then the bank didn’t want the customer to use the rest of their credit line that was available to them.
A recent development is many card companies are looking to lower many peoples’ credit limits almost regardless of their credit score, utilization, or anythign else. They know that anyone who runs up a balance in these times is doing it for a reason that may not result in payment. So they’d like to get that potential liability closed before the horse leaves the barn.
I have numbers very few people can match and I’ve had low utilization cards cancelled in the last 6 months. “We see you’re not using this, so we’ll just kill it for you” is the tone of their letters.
The idea that a typical middle-class American not in trouble can have a few grand in unused credit card line-of-credit just sitting around for use “just in case” is rapidly going away.
I predict Zev’s cards’ credit limits will follow his balances right down to a few hundred bucks each.
I’ve had the exact same thing happen. Kinda funny, I had my whopping $700 credit limit on my Banana Republic card (issued by GE Money bank) cut to $350. I don’t even carry a balance on the card, only use it for the discounts and rewards. Since I don’t have to dress business casual any more, I haven’t used that card much recently.
I second the advice to try talking to the card companies about lowering your interest rates. I’ve had success with this more than once. It works best if you have some ammo, though, such as one card (or other source of credit, like a credit union consolidation loan, if you can get one) with a significantly lower interest rate. Just call up the company with the highest interest rate and tell them you’ve got an offer you can’t refuse (switching your balance elsewhere), and can they match it?
In Zev’s case, this may actually be the better strategy, since the goal should be to get at least one card totally cleared out. Unless the CC company is going to close your account once you pay it off, they HAVE to provide you with some sort of limit, that’s automatic headspace.
I’m also curious why closing cards, after paying them off, is bad for your credit. Isn’t it better to have fewer open credit lines when you’re going for a loan? I’m not even sure why anyone would consider it a negative for a person to decide that they don’t need a particular credit line, and shut it down. It looks like sound financial decision making to me.