One nice thing about having my own Web site is that I can see how my readers find me. As previously disclosed, I monitor my traffic with Sitemeter and Feedburner. I don't collect any personal information about my readers, but I can see how they landed at my doorstep (CreditMattersBlog.com). If they find me through a Google search, meanwhile, I can see what search terms they used. It's quite useful for me, because it often gives me story ideas. Which brings me to today. Seems a lot of my readers are seeing their limits reduced -- to right above their current balances. That's called "chasing the balance," or "balance chasing." And it sucks.
I have mentioned so-called balance chasing several times since July. American Express seems to be the worst when it comes to this. Bank of America probably isn't far behind. However, it's become more apparent that other banks are stepping up the practice as well. (Indeed, someone found my site yesterday in what could be a response to a credit-limit decrease on a Home Depot card.)
I think the people with the highest risk of seeing their balance chased are those who have a significant balance (that does not get paid in full) and those who pay their balances off too slowly. I think credit card companies especially hate "slow payers." These, I believe, are the ones most at risk. The card company thinks that you are struggling when you just make minimum payments, or can't chip away at balances more aggressively.
Chasing the balance sucks because it makes the customer look as though he or she is maxed out on the credit card, which hurts the customer's FICO score. It's bad news for the customer. Balance chasing occurs when you pay off part of your balance and the credit card company reduces your credit limit to just above your new balance. Your card looks as though it is maxed out until you pay your bill in full. Given that utilization accounts for 30% of your FICO score, it's not difficult to understand why balance chasing hurts.
Balance chasing is compounded because other lenders, who monitor your credit reports each month, often get into the act as well. Creditors see your utilization ratio go up, and see your scores go down. Creditors assume you're having financial trouble. As a result, your other creditors reduce your limits, too. It's a vicious cycle. If enough of them get into the act, your FICO score can crater.
There is only one way to ensure that balance chasing doesn't hurt you. Carry no balances. Even if a creditor reduces your limit, it won't hurt your utilization ratio. Of course, if you happen to get a credit-limit reduction during the middle of a billing cycle, while you are carrying a balance that has not yet been paid in full, you could take a short-term hit if you let that balance report to the credit bureaus. If you suffer this kind of credit-limit reduction (mid cycle), my suggestion is that you pay off the balance before the new billing cycle begins.
Another thing that you might consider, if you do realize that your credit-card company is chasing your balance, is ask your other credit-card companies for a credit limit increase. Your goal is to simply replace the limit that you lost with the creditor that is chasing your balance. FICO looks at utilization two ways: per individual account and overall. Adding more additional credit will help your overall utilization ratio, even if the individual card that's being chased takes a utilization hit.
Of course, adding new credit could be easier said than done. If you are being subjected to balance chasing, there's a chance that it is warranted. Maybe you are overextended, which is why the card company is chasing your balance. If you fall into that particular category, it may not be easy to get credit-limit increases or new credit cards. You know my old saying: get credit when you can -- not when you have to. When you need it most (and you're most desperate), creditors often deny you. When you don't need it at all, creditors don't mind extending it to you. It's like that with everything in life, eh?
For those of you reading me for the first time (especially those finding me through a Google or AOL search), at least you now know there is a phrase for what is happening to your credit limits.
Chasing the balance: You now know what it is and you know why it sucks.