Credit card companies’ decisions to unilaterally lower credit limits can have a severe impact on start up San Diego businesses. During recessions, high unemployment rates drive many to consider going out on their own. As they contemplate the decision, young entrepreneurs often factor in their credit worthiness. Start up costs and monthly expenses loom heavy. In addition, the young business owner worries about personal expenses. If possible, they set aside funding to help pay personal expenses six months out or more providing breathing room while the business has an opportunity to grow. Credit worthiness provides comfort during these initial months and impacts a business’ future ability to obtain company credit.
Today, many young entrepreneurs with a history of responsible financial planning and credit management are unexpectedly finding themselves with lower credit scores despite exceptional credit histories. Credit companies are reevaluating credit reports and lowering credit limits based on high balances on other revolving debt despite the fact that their customers have stellar records with them. The negative impact is twofold: first, needed credit lines disappear; second, credit scores are lowered making it more difficult to look elsewhere for alternative credit lines particularly in the midst of this current credit crunch. For the entrepreneur, this can be devastating.
While many argue the practice is legal, there can be little doubt that there is something inherently wrong with it. There are alternative ways for credit card companies to reduce their risk profile – namely higher standards for new applicants. Penalizing good customers is a tough model to stand behind while maintaining even a modicum of goodwill. More importantly, credit customers rely on the good faith of the companies they decide to pay interest to. They had other options at the time they selected which card to apply for and use. They cannot go backward and elect a different company (one of the many credit card companies today that are not engaged in the practice of lowering limits). And worse, their current options are limited because of the lower credit score. Other creditors are raising interest rates instead. While not very pleasant for customers, it is far less impacting than reducing lines of credit and lowering credit scores.
New business should take a hard look at their credit reports. If recent activity necessary for the business’ start up has created new high balances on one or more credit cards, they should look to their remaining lines of revolving debt and prepare for the possibility that those limits might be lowered. This is particularly so for large creditors like American Express and Chase who are both currently engaged in this practice.
If it does happen or has happened already then there are some positive steps to take. Monitor your communications with creditors closely. As soon as you learn a negative action has been taken, act fast. Consider applying for other credit cards immediately before the lowered credit limit appears on your credit reports. CreditCards.com and LowerMyBills.com provide a variety of competitive options. Call and write your credit card company asking them to reconsider. Remind them of the positives they may have overlooked: long history of personal banking with the institution; high checking and savings account balances; long history of large purchases paid off promptly; long history of timely payments and payments above the minimum due; large number of other revolving accounts with zero balances; and other positive factors unique to your personal credit history. Some will review banking statements, pay check stubs, and other documentation in reevaluating their decision. Don’t close the accounts. Closing older accounts with long credit histories can lower you credit score, and having fewer cards will increase your debt-to-available-credit ratio further lowering your score. Finally, although easier said than done, think about ways to reduce your overall debt. This may be impossible for the new business owner, but a long term plan should be in the works.