Taking your credit card to the limit

Accept-credit-cards1How much notice should your credit card provider give you if it decides to lower your credit limit?

Many banks give prior notice before raising limits, but not before lowering them. That can cause serious problems if you spend on your card just as the bank has decided to decrease your limit, but a letter informing you of this has not yet gone out.

Changing limits

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I knew I was well within my limit so just thought nothing of it”

PeterHalifax credit card holder

Peter from Somerset experienced this with his Halifax credit card. He had had some problems making repayments in the past, but for the past few months had been repaying more than his minimum payment on time.

His last statement gave a limit of £2,000, so he thought he was safe to increase his spending to £1,200 the next month, as he told Radio 4′s Money Box programme: “I knew I was well within my limit so just thought nothing of it, I would pay it off eventually in the course of a year like I normally do.”

But the day after his balance reached close to £1,200, he was sent a letter by Halifax saying his credit card limit had been reduced to £750: ” We have taken this action to make sure your credit limit is at a level that we, as a responsible lender, think is appropriate.”

Peter was alarmed that the new limit was below his current balance. He was even more alarmed when he received a letter dated the very next day from Halifax demanding he repay the outstanding £400 immediately or they would instruct debt collectors: “Your account is seriously over your credit limit. To avoid us instructing a recovery agent to collect the amount you owe us, you must immediately pay the amount shown above.”

Fair treatment?

Peter thought Halifax was not treating him at all fairly: “I thought this was ridiculous. I don’t mind them reducing my credit limit, but they really should not reduce it to below a level I have already spent.”

Peter was still in discussion with Halifax about what his credit limit should be and over what time frame he should pay off his balance when Money Box contacted the bank on his behalf.

Halifax said it would never intentionally set a new credit card limit below an existing balance, but this could sometimes happen if a customer spent while their limited was being changed: “Unfortunately, as a result of this crossover, Peter exceeded his limit through no fault in his own.

“To help him through this situation we have subsequently decided to increase his limit to cover his current balance and any related fees will be waived.”

Barclays said it gives three days’ notice prior to lowering a limit, but most other credit card providers Money Box contacted said like Halifax they also did not give prior notice to people. They said this might encourage customers who might already be in financial difficulties to then spend up to the old limit, increasing their debts.

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I think that’s pretty unfair practice”

Peter TuttonHead of policy, Step Change

Advance notice

The Office of Fair Trading currently regulates consumer credit. It told Money Box in its view credit card providers should notify customers in advance if they were intending to lower their card limit. But it said there were some exceptions, such as when to do so would significantly increase the risk of the borrower being unable to fulfil his obligation to repay.

Debt counselling agencies say they understand why a bank would lower the credit limit of some customers, but that this should never be below the current balance.

Peter Tutton is head of policy at the debt counselling charity Step Change: “I think that’s pretty unfair practice. It’s creating a situation where someone could be put in potential default and under financial stress solely through the actions of the bank.”

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