Chicago Bankruptcy Lawyers See the Benefit in Lower Credit Card Limits
It's kind of ironic. It was too much credit that got us into this financial mess - now too little credit might be making it difficult to get out.
A FICO study found that 33 percent of Americans - including those of us who haven't done anything to negatively affect our credit -- saw our credit limits reduced between October 2008 and this April. In the six months before that, an additional 25 percent saw limits slashed.
At first glance, that's bad news. A lower credit limit is not only easier to exceed (and thus get penalized for), but it has the potential to worsen your credit rating even when you follow the rules. How? By affecting your debt-to-limit ratio.
The more debt you have relative to your credit limit, the worse your score is going to be. For instance, let's say you have a $5,000 limit and you typically charge $2,500 a month. That means you're using 50 percent of your credit. But let's say that limit gets dropped to just $3,000. Now you're using more than 80 percent of your limit - launching you into the category of the most high-risk borrowers - even though you're spending no more than before.
Creditors say they're not singling anyone out - they have to lower limits to reduce overall risk in a tough market. But it doesn't ease the pain.
However, there is a silver lining in this situation. If you find yourself regularly approaching or exceeding your credit limit, maybe this is your motivation to wean yourself off the plastic. The problem with credit is that it makes it too dang easy to spend beyond your means. As your principal balance increases, so does the amount of interest you pay each month. And as your credit card bills rise, you probably find yourself reaching for your card more and more. It's a financially deadly cycle. Bankruptcy can help you break it.
With the right bankruptcy plan, you'll be able to start paying down your debts in affordable increments. With less debt, you'll owe less to creditors - meaning you can keep more of paycheck each month. With more money in your pockets, you'll rely less on plastic, so you can improve your debt-to-limit ratio - and your credit score. It's like working backwards, a snowball effect that leads you to financial freedom.
Find out how bankruptcy can free you from the grip of creditors when you sign up for a free personal debt analysis with a DebtStoppers bankruptcy lawyer in Chicago. Losing your credit might be the best thing that ever happened to your finances.