Your Bank Cut Your Credit Card Limit. Now What?

Last month, I joined the millions of American entrepreneurs who have had their credit card spending limits cut by banks desperate to shore up balance sheets. Like many, I had a stellar credit rating, one that put me among the top 1 percent of credit card risks in the country. But it didn’t matter to my bank.

“Banks are looking to cut their risks any way they can,” says Bill Hardekopf, CEO of LowCards.com, a Web site that offers information on thousands of credit card offers. “They’re increasing interest rates, cutting credit limits and closing people’s accounts, especially accounts that haven’t been used for a long time.”

This behavior isn’t entirely capricious. Robert Hammer, chairman and founder of credit card consulting firm R.K., says banks are under pressure on multiple fronts. Credit card charge-off rates, which he calculated at about 4.5 percent just two years ago, will likely double this year, he says, producing losses of about $65 billion for card issuers. Meanwhile, the federal government is pressuring banks to boost their capital reserves, which must be held against credit card lines whether they are in use or not. The less credit banks offer entrepreneurs like you and me, the less capital they need to meet their reserving requirements.

Unfortunately, this approach to risk management can have grave consequences for small-business owners. Those who have no other access to credit — not, fortunately, my situation — might face a cash squeeze. And all run the risk of worsening their credit rating. That’s because one driver of your credit score is your ratio of debt to available credit. The higher that number, the more lenders view you as a risky borrower. If just one bank cuts the credit limit on just one of your cards, your ratio will go up. If that reduces your credit score, it raises the odds that other card companies will cut your credit lines, too. Unchecked, this could soon put a hurting on your credit score — and your available credit.

Credit experts routinely advise clients who’ve had their limits reduced to call the bank that issued the card, explain what a loyal and responsible customer they’ve been, and ask for their old terms back. If that doesn’t produce results, ask to speak with a supervisor. If that doesn’t work, Hardekopf recommends persistence. “If your bank says ‘no’ this month,” he explains, “there’s nothing to say you can’t call back the next month or the month after that.”

Card experts insist all this can work — sometimes. In my case, it didn’t, and within a few days of my initial rebuff, I understood better why it hadn’t. Going from bad to worse, my card issuer announced that it wasn’t just cutting back on its credit card business, but getting out of the business altogether. Nearly one million small-business customers were impacted.

If your bank stands firm, too, you can always try to get a card from another one. “We’re in a tough climate, but this is still a very competitive industry,” Hardekopf says. “Card issuers are still looking for new revenue. They want new customers who are good customers.”

Besides shopping the big national issuers, be sure to check out smaller financial institutions in your area that may have more flexibility in tailoring a lending decision to your circumstances. “There are 6,000 card issuers in the U.S.,” notes Hammer. “Local and regional banks don’t typically have the highest rates or the highest fees, and PR is important to them.”

While on the hunt for a new card, you may need to cook up some creative ways to conserve — or bring in — cash. Eva Sztupka-Kerschbaumer, who has operated a day spa in Pittsburgh for seven years, recently had her credit card lines from two card issuers cut to zero, she says, despite never being delinquent in her payments. So, when she needed to upgrade and replace several pieces of equipment, she launched a “Cinco de Mayo” promotion in which customers who bought a $500 gift certificate got a second gift certificate of equal value free. She took in a quick $28,000 in sales and used the proceeds to buy her equipment without taking on new debt.

Robin Holstein, president of virtual administrative services company Robin’s Desktop in Diamond, West Virginia, cut back on advertising when her card company reduced her credit line and, when it was time to replace aging equipment, she started buying remanufactured or clearance goods rather than new. “I did not contact my card company to increase my limit,” Holstein says. “I figured I’ll work more with cash and less with them. Considering the shape of the economy, I feel it’s actually been a blessing. My funds aren’t tied up in high interest rates and fees, and there’s more for me to spend on my company.”

Finally, it wouldn’t hurt to hope for a little serendipity. Shortly after my credit card company exited the business, another bank that had recently refinanced my mortgage offered me one of their credit cards. It only has one-third the credit limit of the card it’s replacing, but it was a welcome step in the right direction. Here’s wishing you similar good fortune.

A former reporter for The Wall Street Journal and Dow Jones and contributor to Barron’s, Randy Myers is a contributing editor for CFO and Corporate Board Member magazines.