You may be in the category of credit card users who need to apply for a new card and didn’t even know it…until now.
In what money expert Clark Howard likes to refer to as “nasty-grams,” several major credit card issuers have been sending notifications to cardholders to inform them that their credit limits have been lowered amid the financial uncertainties of the coronavirus pandemic.
Not only does this hurt your spending power, it also can negatively impact your credit score. And, believe it or not, there’s nothing you can do to stop your credit issuer from making this change.
Clark has some special guidance for those who have been impacted by these changes: He wants you to acquire more credit from a different card company while they are still accepting new customers.
“If you’re in a position where you still have a good job and you’ve got good credit, please don’t delay. Go ahead and apply for a card.”
Who Should Apply For a New Credit Card if Your Limit Is Lowered?
Clark says the person who should be seeking a new credit card during the financial turmoil of COVID-19 is someone who is still employed, feels good about their long-term job situation and also has a good credit score.
“I want you to go ahead and apply for at least one more credit card from a different issuer than anybody you’ve got. Because the other shoe that’s dropping is credit card companies have lost their fever for the flavor of getting new customers right now,” Clark says.
For example, if you have a card with Discover and American Express, you should consider seeking a new card from Capital One or Chase.
Clark believes that there is a limited window to apply, so he wants you to seize the opportunity before it shuts.
Why Taking No Action May Hurt Your Credit Score
If your credit limit has been lowered but you are not in need of more spending power, you may be wondering why any action is needed at all.
The reason is that how much available credit you have versus how much credit you’re using accounts for nearly a third of your credit score. For example, if you have a $2,000 card balance and your issuer drops your limit from $10,000 to $5,000, you can do the math on how that adversely impacts your credit utilization. It’s a jump from 20% to 40% without a single change in your spending.
Clark warns that can be bad news for both your credit score and your chances of acquiring credit in the future:
“If a credit card company shuts you down or cuts your limit severely, suddenly to the credit scoring models you look like a much worse credit risk that nobody would want to have any business with. And that can cascade and feed on itself,” Clark says.
Which Type of Credit Card Should You Get?
Clark is a big fan of cash back rewards cards because of the ability to earn money as you spend, so that may be a good segment of the market to start exploring.
“My favorite reward cards are ones that actually pay you money. I want cash, because nobody can tell you when you can or can’t spend your cash,” Clark says.
Clark cautions that rewards cards are only good if you pay the balance off every month. If you carry a balance, he suggests that you look instead at a credit union-issued credit card because they can offer interest rates that are sometimes as little as half the national average.
He also has issued the advice of considering a card with 0% APR on new purchases to utilize during the coronavirus pandemic. That way, you will not encounter early interest payments if you do find yourself having to use a credit card to get by financially as a result of COVID-19.
Keep in mind that cards that reward things like hotel stays, airline miles or dining and entertainment may be a potentially poor path to rewards utilization both during and coming out of pandemic conditions.
This is especially troublesome when you consider that many cards have a welcome period for accumulating bonus rewards within the first year of membership. It’d be a shame to get a new card with a great first-year airlines bonus and find yourself grounded for much of the first 12 months due to health concerns, for example.
Why Are Credit Card Companies Doing This?
To put it simply, card issuers are uneasy about the state of the American economy as a result of the COVID-19 pandemic.
One method of mitigating the increased level of risk that comes with financial uncertainty is eliminating exposure to consumer debt. That can be accomplished by cutting the amount of funds they allow consumers to borrow, or even cutting off some customers from borrowing at all.
CreditCards.com analyst Ted Rossman says that we can look back to the Great Recession as an indicator for what may happen in the months ahead:
“Most people don’t realize how much freedom credit card issuers have to cut limits or even cancel cards without warning. Looking back to the Great Recession as a guide, the October 2008 Fed Senior Loan Officer survey found 20% of card companies cut credit lines for customers with prime credit scores and 60% reduced lines for subprime cardholders. Banks are once again very nervous about the state of the economy and the job market and they’re pulling back on their risk exposure.”
Rossman says dormant credit cards are prime candidates for cuts and cancellations during this period. He suggests making a small purchase with existing cards to make sure they show as active.
He also says cards that are near their current credit limit are in danger of cancellation. So, if you can, paying down on any outstanding balances could help you protect the cards you already have.