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“I tried to charge a new computer on my credit card and it was declined,” an AARP member recently wrote me. "I knew I wasn’t even close to my limit and I’d paid my bills. Later, I discovered that the credit card company reduced my credit limit without even notifying me. Can they do this?”

Yes, they can. It’s called "universal default" and is in the fine print of almost all credit card agreements. Credit card companies give themselves the right to change the terms of the agreement—interest rates, payment dates and credit limits—with little or no notice. (Congress passed legislation to improve the situation, but it won’t take effect until 2010.)

Many credit card holders are getting similar notifications these days. The stumbling world economy creates an environment where people are statistically more likely to overextend themselves and end up defaulting on their short-term debt. Accordingly, the same credit card companies that were handing out plastic like lollipops a year ago are now reeling in credit lines and ratcheting-up interest rates in an effort to minimize potential losses. Individual account adjustments are made according to a complex algorithm that analyses a cardholder’s income-to-debt ratio.
 

First of all, I would like to caution anyone from falling into the trap of using credit cards in place of real income for ongoing regular expenses. In times like these, instead of taking on more debt, a better approach is to cut back on expenses or look for other income. As most of us don't pay off our balances every month, every dollar charged on a credit card will typically cost at least two-dollars to pay back.

That being said, there are good reasons why someone might need to retain a higher balance on a particular card than the income-to-debt calculations would initially award them—a card that’s used for business, building airline mileage credits or other special purpose.  

I have some suggestions on how you can improve your chances of getting your higher balance or lower interest rate reinstated. The first step is to call the credit card company and ask specifically why the change was made. If they were responding a negative listing on your credit report, you might be out of luck—at least until you can get it straightened out. However, if you just fell victim to a changing formula, there’s a good chance you can get them to reconsider. As I said, the formula relies mostly on your income-to-debt ratio. This takes into account all of your potential debt, not just what you’ve already borrowed or the balances already on your cards. 

If you’ve got a handful of inactive or “backup” cards in your desk drawer, they are likely cramping your credit consideration. For example, if you make $100K per year and have five credit cards with $10K limits, your income to debt ratio is 50%—it doesn’t matter whether you’ve actually charged anything on those cards.  If you need a $20K limit on your primary card, you can offer to cancel one or more of the other cards in order to improve your ratio. The same principle applies to lines-of-credit and similar revolving debt. Make sure you’re talking with someone high enough up in the customer service hierarchy to make the decision, and document the agreement by taking notes of names, times and specifics of each conversation. 

The same process can be used to negotiate a reduction in your credit card interest rate. In both cases, you will want to stress that you are a loyal customer and will continue to be… if they can only help you out. After all, even in hard times, businesses still need to do business.