Just as we all grow more reliant on credit cards to help pay monthly bills, and keep us in a life-style we've become accustomed too -we're being hit by a one-two punch. First off the card issuers are reducing the borrowing limits of thousands of their consumers, to combat the credit crunch, which then can lead to those customers getting lower credit scores.

Those who this has happened to may be unaware until they apply for a loan or another credit card, and it gets denied because their credit score has dropped.
This is an unintended consequence of the financial world's widespread limiting of risk- since the collapse of the sub-prime mortgage market. Banks and other card lenders are trying to protect themselves from more massive losses, which claimed high profile companies like Northern Rock and like those they've seen from sub-prime mortgages.

Part of this reduction of risk includes lowering the potential they will have to pay out should a customer default on a loan. That's why they are lowering credit limits, which means they are reducing the maximum amount of credit extended to an individual.

"This is what they have to do at this time," said John Hall, a spokesman for the American Bankers Association, a Washington-based trade group. This comes at the worst possible time for consumers, who now use credit cards as a form of liquidity, to pay for home renovations to vacations to any number of economy driving services. This is due to a decreased amount of available releasable equity in people's property.

In the US, net home equity extraction fell nearly 60 per cent from a year earlier to $205 billion in the first quarter, according to Merrill Lynch. The investment bank further noted that $1.2 trillion in equity and housing wealth was wiped out in the first quarter alone because of plunging home values.
At the same time, the US, and the world, saw revolving credit usage sharply accelerate to a year-over-year growth rate of about 8 per cent. That's the fastest rate in seven years and well ahead of the 2 to 3 percent rate of growth from 2004 through 2006 when home equity lines of credit were a bigger source of cash for consumers, according to Merrill.

The problem is that this has left consumers with high debts which they assumed they would have an indefinite amount of time to pay off in monthly installments but now face, with the credit limit drop, immediate and punishing bills. American Express warned that more of its customers were falling behind on their payments. That led some Wall Street analysts to forecast that the card company may soon lower its predicted earnings growth for 2008.

"Business conditions continue to weaken in the U.S. and so far this month we have seen credit indicators deteriorate beyond our expectations," American Express' CEO Kenneth Chenault said in a statement.

This is why companies such as HSBC are lowering their credit limits and protecting themselves from risk, according to the consulting firm Institutional Risk Analytics.
Some consumer representatives have said this could be a good thing, as it is limiting the debt people can find themselves in.

"In the purest sense, it is the better way to manage the risk of a cardholder," said Linda Sherry, director of national priorities for Consumer Action, a national non-profit consumer rights and education group. She also said, "But a low credit limit can also unknowingly hurt a credit score."

It does this by changing the ratio of borrowed money to available credit, say for example you had a £20,000 limit on your credit card, you currently borrow £5,000 meaning you've only borrowed 25 per cent of what was available. Now say the issuer lowers your limit to £10,000 suddenly you're borrowing 50 per cent of your maximum allowable.

It can completely change what is known as the credit utilization rate, which is factored into the calculation of one's credit score, which measures credit worthiness.
A lower credit score could make it more expensive for someone trying to borrow money or rule them out entirely. This could leave someone without access to credit or debit cards, secured or unsecured loans and unable to get a mortgage. This could potentially have a knock on effect to the world economy which is currently being sustained by high consumer demand and retail spending.

Banks and credit lenders are required by law to let you know about any changes to your terms or service, but this can give you as little time to make changes as two weeks -hardly time to repay the debt- and they don't have to tell you how it will affect your credit rating or how to repair your credit rating. That puts the burden on consumers to protect themselves.