We’ve seen how available balances can disappear when lenders cut credit card limits, but SmartMoney points out that lenders can cut your limit below your current balance, causing all sorts of problems. They’ll send you a notice, of course, but you may not receive it for several weeks. Your best bet is to set up your own alert system. A web-based financial service (like Mint) will send you an email or SMS alert if your available balance drops below a specified threshold.

Is cutting your limit below your balance really legal, you ask? Why, yes!

Nasty as it may be, the practice of cutting credit lines below the balance is legal — at least, for now, says Chi Chi Wu, a staff attorney for the National Consumer Law Center, a consumer advocacy group. Federal Reserve rules requiring lenders to give cardholders 45 days notice before reducing a credit line to the point that it would trigger penalties won’t go into effect until July 2010. “[Until] then, there are no federal protections,” says Wu.

One of the stories in the article describes how a man who owed $359.99 on an account with an $8,640 credit limit saw his limit cut to $300 without warning. To make things worse, HSBC slapped a $35 over-limit fee on his account. He contacted HSBC and got them to “waive” the over-limit fee, so be sure to contact your bank to complain if an unannounced credit limit reduction triggers unanticipated fees.

“How to Blow Your Credit Limit — Without Spending” [SmartMoney] (Thanks to Dragonfire1981!)
(Photos: jenlight, Andres Rueda)

Want more consumer news? Visit our parent organization, Consumer Reports, for the latest on scams, recalls, and other consumer issues.