What to do if Your Credit Line is Slashed
If you are a small business owner who has just heard from your credit card company about a credit line reduction or elimination, you are not alone. As if credit wasn’t tight enough, this is happening all over these days, and many of you depend on your business credit cards for managing cash flow. But there’s more. These actions can also harm your credit score and make it even tougher to get a loan in the future. Here’s what to do:
Keep your eye out for notifications. Your credit card company is required to notify you of any changes to your credit card terms, but you must be on the lookout when each statement arrives.
Understand your credit score. It’s important to understand the impact a reduction of your credit limit or the cancellation of a whole line of credit can have on your credit score and to do what you can to prevent any damage. To understand the impact you need to understand the credit utilization ratio that is used to calculate your FICO score, because about 30% of your credit score is based on it.
Here’s how it works. Your credit utilization is the percentage of your available credit that you’ve already used, and that percentage is considered for each individual line of credit as well as for your total credit. According to Kimberly Lankford at Kiplinger.com, it is generally recommended to keep that percentage under 25%, even if you plan on paying off the balance each month. For example, if you have a card with a $10,000 limit you should never spend more than $2,500 on it.
Say you do have a business credit card like this, with a $10,000 limit, and you’ve spent $2,500 on it already, and your credit card company notifies you that your line of credit has been reduced to $5,000. Suddenly you’ve gone from using 25% of that line to 50%, and that will hurt your score. Or say you’ve been carefully using 25% of all your combined credit, and the credit card company calls and says they are eliminating an entire line of credit. This will reduce your total credit and increase your credit utilization percentage thereby damaging your score as well. So what can you do? You have some options:
Reduce your balance. Pay down as much debt as possible to bring your credit utilization percentage down.
Pick up the phone. Call your credit card company and negotiate with them. You might be able to get them to increase or reinstate a line of credit, especially if you are a long time customer. Ask to speak to the manager; emphasize your loyalty or even threaten to take your business elsewhere. If you have more than one business credit card, you might also want to call your other credit card companies and ask for a limit increase on these cards.
Use your cards. Lately some credit card companies have been using inactivity as a reason to close accounts, so don’t let this happen to you. Charge something every month, if only a little, to keep your account active.
Consider a new business credit card. Although there are fewer and fewer, there are still business credit card offers out there and they can be found easily at comparison sites online.
