There’s been some weird stuff going on with credit cards right now — perhaps you’ve noticed? Or wait, maybe you’ve been too busy trying to keep your job, your health, and your sanity so that you can pay for groceries and maintain some hope of financial security. My friend Amy was preoccupied with all of the above when her credit card got declined out of the blue at a gas station recently. When she called her credit-card company, it said it had actually closed her account entirely — hadn’t she gotten the notice about it, mailed 45 days prior (as required by law when a card issuer makes “major changes” to a cardholder’s status)? But Amy had been staying at her sister’s house since June, helping out with child care, and the letter never reached her. “Can they really just close my account like that?” she asked me.
They can. And they are — according to one survey, about 70 million people had a credit card closed or their credit lowered without their permission between May and July this year. (That’s about one in three cardholders, for context — a lot of people!) And these actions have serious consequences — closing a person’s credit card or lowering their credit limit can hurt their credit score significantly, or cost them a financial lifeline if they were relying on their credit card for backup.
Over the past few months, I’ve gotten a lot of questions from people in Amy’s position or close to it — people who are walking the thin financial line between relatively okay and not really, who aren’t sure why the rules around credit cards seem to be changing and what they should do about it. The gold-standard answer is the same as always: Pay your credit-card bills on time, every month. But that also seems like a cruel joke right now — what if you can’t pay that bill immediately, or if it interferes with a different need, like another bill, or saving up some emergency cash, which is also crucial? How should we choose between these shifting priorities?
To answer these questions, I spoke to several credit-card and debt experts. But first, a quick note: If your credit-card debt has spun into unmanageable territory, I recommend that you read this post instead. And if you’re contemplating bankruptcy, this other post might be more helpful. The topics explored below are meant to address less dire — but still important — questions about using credit cards in this weird economic landscape.
How worried should I be about my credit-card limit being reduced or my account being closed without my permission?
If you’ve followed the normal guidelines for credit-card usage (made your payments on time, kept your credit score stable, used your card regularly, and haven’t maxed out your account), then you should probably be okay, says Beverly Harzog, a consumer-finance analyst for U.S. News and World Report and author of The Debt Escape Plan. But there are no guarantees. “I’ve seen plenty of people with good, consistent habits have their credit cards closed recently,” she adds. “These are not normal times, and I can’t tell anybody what to expect.”
Technically, credit-card companies are supposed to give an explanation before they lower your credit or kick you off your card without your permission. (Usually it’s because you missed or were late on a bill, your credit score went down, you haven’t used your credit card in a while, or you went over your credit limit.) But card issuers also have a lot of leeway in deciding how creditworthy they think you are — especially when the economy is in shambles and they’re nervous about their own debts.
“Credit-card companies are trying to reduce their own risk right now,” says Bruce McClary, a vice-president at the National Foundation for Credit Counseling. “Sometimes that means you look at their statement and get the unpleasant surprise that your credit limit has been lowered suddenly and significantly.” Bottom line: If you need a hardship program, don’t put it off — the sooner you ask for it, the better. But if you can pay your bills on time — or at least your monthly minimums — be sure to do so. That, plus keeping your credit-card debt relatively low, is the best thing you can do to avoid an unwelcome hit to your credit score.
My credit limit was lowered by $5,000 on one of my cards. Is there anything I can do about it?
This is not unusual. The survey I mentioned above found that 22 percent of all cardholders had their credit limits cut by more than $5,000. So don’t take it personally, even though it’s alarming. That kind of reduction messes with your credit-debt ratio, which is the ratio of your credit limit compared to how much of it you’ve actually used, and is a major factor in calculating your credit score. Long story short, this will hurt your credit.
But there may be something you can do about it. “In this case, I believe consumers have more power than they know,” says Harzog. “If you’ve got a great credit score, call your credit-card company and ask why this has happened.” The tricky thing is that “great” is relative — it used to be that a credit score of 700 or above was good, but a lot of credit-card companies are currently being more cautious. If you have a 760 or above, you’re golden. 740 and up is grounds for negotiating. If you’ve missed payments or lost your job, it probably isn’t the best use of your time to argue with your creditor. “If you’ve got a sloppy payment history, now is not the time to call attention to yourself,” says Harzog. “But if you’ve got a spotless payment record, go ahead and try to see what can be done.”
If you do call, Harzog recommends sticking to a script. “I would stay very calm and polite. Make a couple of bullet points beforehand, like what your income is and how your job security seems solid. The change with your credit card could be due to some misconception on their part. Errors happen.”
I have about $4,000 in debt on my credit cards that I could pay off in a couple of months if I needed to. But right now, I feel like I need to focus on building up my emergency fund instead. What should come first?
I wish I could give you some kind of formula, but this one is a doozy. In normal times, the rule of thumb is easy: Kill off any consumer debt (like credit cards) before you focus on an emergency fund, because that debt costs a lot of money in interest. But right now, the order of operations is less clear, because job security is more tenuous and having cash on hand is important (especially since credit cards aren’t a reliable backup, as we’ve established).
“You do need an emergency fund,” says Harzog. “At a minimum, one month of expenses. Better yet, have three months, ideally six to nine months.” Of course, expecting to save up that kind of cushion in the middle of a pandemic and a recession is a little crazy; use your best judgment. It’s all a balance of how secure your job seems versus how much wiggle room you have with your expenses. If you work in the airline industry, for example, you should probably prioritize a cash emergency fund over your credit-card bill. These things are very subjective. Make a budget for some worst-case scenarios with a pen and paper — do you have a relative you can move in with? What are the expenses you can cut, in what order? I hope you won’t have to resort to these measures, but it helps to do the math and prepare.
Is it a good time to open a new credit card right now? My credit score is still okay, and I want to boost it more if I can.
Sure! Just be aware that credit is extra tight these days, so creditors are being abstemious about limits and cards in general. Again, if you have an excellent credit score — we’re talking 760 or above — then the credit-card world is still your oyster. But make sure it’s something you can keep track of, because any wrong moves with your credit cards right now could cost you extra. Also, think about what you actually need, Harzog adds. “Airline rewards might not be so useful right now. But cash-back cards could save you money. Same with cards that offer rewards at stores where you shop regularly.” If you have the luxury of options, do your research.
Is it a bad time to close a credit card?
Generally speaking, yes. Closing a credit card usually does ding your credit score, at least temporarily, because it hurts your credit-debt ratio. But if one of your credit cards has a big annual fee — as plenty do! — and isn’t serving you in terms of the benefits it offers, then it’s definitely worth reconsidering, says Harzog.
Should I call and see if I can get my APR reduced, or could that hurt me (i.e., lower my credit limit or credit score) in some way?
Calling to get your interest rates reduced should not impact your credit score directly. But it could spook your creditor and land you on an express train to getting your account shut down or your credit limit cut. Remember, creditors are on the lookout for signs that you might not be able to pay back your debt, and they could interpret your call as such. But if you have a great credit score and you are carrying some debt, it’s worth a shot to see if you’re eligible for a lower APR. Conversely, if your debt is spiraling out of control, call quickly and get on a debt-relief program rather than trying to toggle between bills.
I’m thinking of getting a zero-interest credit card to roll over my debt and try to pay it off in the next year. But is that a bad idea? Should I wait until the economy is better?
This would normally be a great idea — zero-interest credit cards, also known as balance-transfer cards, are one of the best and most efficient ways to get rid of credit-card debt. But be aware that if you don’t have an emergency fund yet, this tactic could backfire — zero-interest credit cards have extra-big penalties and interest rates if you miss payments or don’t make your minimums. So if anything goes sideways, your medium-size mess could grow to extra large very quickly.
In other words, if you’re going to pay off your debt, you need to be ready to commit. “If you are able to get a balance-transfer card, which is already harder right now because it requires a better credit score, try to make sure it has a longer runway,” says Harzog. “It’s a lot less risky if your balance-transfer card gives you two years to pay it off instead of one.”
Ultimately, this is a time to be patient. Your finances might be shaky and it’s not ideal, but don’t beat yourself up about it. “At this point in time, it might be a little bit unrealistic to expect to get yourself out of debt,” says Harzog. “What is paramount is trying to keep your credit score as good as possible, so that when the economy does improve, you’re primed and ready to take advantage of it.”