Is My Credit Limit Safe?

"Max" is worried about whether his credit card issuer might lower his credit limit:

I heard you on a talk show yesterday in NC.  I have a question.  I have a credit card of $1500 that I am almost at the limit with.  I was going to pay down the whole balance in November, however I have heard that because of the crisis, that credit companies might be reducing balances.  Should I pay the whole balance down or just pay on it bit by bit to see if by credit line is reduced?

My reply:

My advice is typically to pay off the debt so you can avoid paying interest. But I think you hinting at something more here. I assume that you don't have a lot of money in savings, and that your credit card is your financial back up. If I am correct, here are the possible scenarios:

1. Worst case scenario: You take your savings and pay off the credit card. Your card issuer lowers your credit limit or closes the account altogether. You now have no savings and little or no credit line to fall back on in case of emergency.
2. Best case scenario: You take your savings and pay off your credit card bill. You have no savings but your credit card is there as a back up while you rebuild your savings account.
3. Middle of the road: You keep your savings account, keep paying on the credit card bill and at some point pay off the credit card. In the meantime you pay interest.

I don't know what your interest rate is, or your credit rating. But my guess is with a $1500 credit line it's unlikely your issuer will cut your limit drastically. It's just not that big of a credit limit in the scheme of things. So I think you are likely safe paying off the credit card bill with your savings, provided you start rebuilding your savings account immediately.

If you're not comfortable taking that risk how about keeping your savings intact and finding other money to pay off the bill faster? Sell stuff on ebay, get a second job until the holidays etc.

Let me know what you decide and what happens!

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com. Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Stop Debt Collectors: How to Protect Your Rights and Resolve Your Debts