Relying on a line of credit in a shaky economy is like expecting a weak bridge to weather a storm and carry you to survival.
It is not uncommon for credit card issuers to minimize their risk by lowering credit limits or closing accounts when there is potential for financial distress. Credit card issuers took these actions during the Great Recession and early in the COVID-19 pandemic, according to a 2022 report from the Consumer Financial Protection Bureau, perhaps due to changes in credit profiles, internal account performance metrics or shifts in the issuer’s risk management policies.
Even as an uncertain option, a line of credit is still a bridge worth keeping to supplement or back up an emergency fund, especially before a potential recession. There’s no foolproof strategy to prevent an issuer from lowering credit limits or closing accounts, but some actions can minimize the impact on your wallet and credit score.
Keep credit cards open and active
In March and June 2020, many accounts owned by cardholders, even those with high credit scores, were closed due to inactivity, according to a CFPB special issue that same year. Inactive cards don’t earn the issuer money in fees, so they pose a greater risk to the issuer in tough times.
It’s worth keeping credit cards open and regularly charging scheduled purchases to give issuers one less reason to touch your account, but it may not be enough.
For Timothy Barnes, an auto mechanic based in Rocky Mount, North Carolina, it didn’t matter that he was still employed at the end of 2020 with active accounts in good standing. One major issuer closed several of its accounts and scrapped over $17,000 in available credit.
“It was a day of buying something online and the credit card was declined,” says Barnes. “They said it was a risk, but I didn’t even miss a single payment.”
In the past, some lenders did not give cardholders reasons for credit limit reductions. In May 2022, the CFPB’s advisory opinion on the Equal Credit Opportunity Act confirmed that lenders must provide an “adverse action notice” explaining the reason for adverse decisions.
Consider requesting a credit limit increase
Consider applying for a higher credit limit on frequently used credit cards if you pay on time and don’t use more than 30% of your available credit. Income is another factor considered by issuers for a credit limit increase, says Derek Mazzarella, a certified financial planner with Glastonbury, Connecticut-based firm Gateway Financial Partners.
“If your income has increased since you last applied for the credit card, or you haven’t updated it in a while, I want to make sure your income is actually up to date,” says Mazzarella.
Some issuers allow you to update your income by logging into your account, and they use this information to increase the credit limit, without the need for a request. Credit scores may temporarily drop when you request an increase, depending on the issuer, so ask how credit is affected before doing so.
One of the biggest factors in credit scores is utilization, or how much credit you have available to you compared to how much you use. A credit limit increase can increase available credit and help build credit scores. The opposite is true if a credit card issuer hacks away at a credit limit later—scores will take a hit. One issuer’s reductions can even have a ripple effect on other credit card limits.
A credit limit increase can lessen the impact of a future reduction, but it won’t protect against an account closure, which can also cause the score to drop.
“My credit changed pretty much after they did it, but before that it was outstanding,” Barnes says.
Weigh the potential pros and cons of applying for financing in the near future to determine the best course of action.
Diversify credit lines
Barnes had multiple credit card accounts with one issuer because it was convenient. Luckily, he also had an emergency fund and a few other credit cards that weathered the financial storm of 2020.
Consider building other bridges by opening a credit card at another institution if you don’t already have one. If you tend to overspend, stick to a lower credit limit to rein in spending, Mazzarella says.
A new card application can cause a credit score to drop temporarily, but probably not as much as a credit limit reduction. For flexible spending, look for a general purpose credit card accepted by most merchants.
Manage credit limits strategically
Use your available credit wisely so it remains manageable. If possible, keep track of the finances by:
- Manage current credit cards responsibly before opening another.
- Spacing credit card applications by six months or longer to reduce the impact on credit scores.
- Uses less than 30% of available credit.
- Paying more than the minimum on time.
- Having an emergency fund to avoid relying on credit cards.
- Creating a plan to pay off large purchases before they are added to a card’s balance.
- Asking credit card issuers to keep your credit lines or accounts open if they intend to act on them.
This article was written by NerdWallet and was originally published by The Associated Press.