As credit card companies continue to cut credit limits, some account holders are winding up in an uncomfortable position. There have been plenty of reports of lenders reducing credit limits below your current balance. Smart Money reports:

Paul Pensabene of Saratoga Springs, N.Y., received a statement from HSBC on Dec. 8 that said he had a $359.99 balance and remaining available credit of $8,640. But when he went online to pay the bill several days later, his online account showed that same balance put him over his newly-reduced credit line of $300. And that didn’t include the $35 over-limit fee.

If you’ve been caught up in a similar situation, it’s unlikely that you’ll be able to get your credit limit raised back to previous levels. However, there are a few steps you can take to reduce the problems caused by a change in your limit.

1. Ask to have the initial fees dropped: If you’ve been a good customer, you can usually get your credit card company to drop the penalties triggered by a drop in your credit limit. However, if your balance remains over your new credit limit, you should be aware that future fees probably won’t be waived. You’ll need to call the credit card company, and you may need to be firm with the representative you speak to — remember, you aren’t at fault in this situation.
2. Decide what to do about your balance: You may not be able to pay off enough of your balance to bring it under your new credit limit before the end of the month (and your next bill). But that doesn’t mean you’re stuck with overage charges. Consider transferring part of your balance to another card, if you have to.
3. Set up balance alerts: Even if you can get your balance back under your credit limit in a hurry, it’s easy to forget about the change when you’re actually using your card. You can set up text message alerts for when you approach your new balance — many credit card companies provide this service, as do online money management applications like Mint.
4. Keep an eye on your credit: There’s no way for an abrupt drop in your credit limit to have a good impact on your credit score. In most cases, it will cause your score to drop. That means that you’ll not only have to be extra careful of potential dings to your credit in the future, but you’ll likely need to work on bringing your score up again. One of the simplest solutions in this sort of situation is to focus on paying down credit card balances as fast as possible.

At this point, it’s legal for credit card companies to reduce credit card limits to the point where the card holder is saddled with fees — with no advance notice. New rules take affect in July 2010 requiring lenders to give cardholders 45 days notice if a credit line reduction would trigger penalties. But that’s still far off: in the mean time, the only thing you can do is to try to protect yourself in the event of changes to your credit card.

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Banks and lenders are working hard to cover their own tails. They’re reducing credit limits even for reliable customers on everything from HELOCs to credit cards — even on customers with excellent repayment histories. The Wall Street Journal reported last week on American Express’ changes, looking at one couple in particular: John and Monica Bell, of Pennsylvania. The Bells previously had a card with no limit, on which they never carried a balance. On average, they would charge approximately $5,000. American Express imposed a $1,100 credit limit on the Bells recently:

AmEx customers who pay with plastic at the same places where Mrs. Bell shops and have the same mortgage lender have poor repayment histories, according to a letter sent by AmEx.

“They’re holding me accountable for someone else’s credit,” fumes Mr. Bell, a real-estate agent in Chadds Ford, Pa. His mortgage loan came from Countrywide Financial Corp., now part of Bank of America, and his wife uses the AmEx card at retailers Wal-Mart Stores Inc. and the Marshalls unit of TJX Cos. and to fill up her tank at Sunoco Inc. gas stations.

It’s not just American Express who’s cutting limits, though. And those shrinking limits can wreak havoc on your credit score, even if you aren’t carrying a balance. Credit scores are partially based on the ratio of debt you have to the debt you could have. Your credit limit marks the amount of debt you can afford — that you could have. If that number suddenly drops, so does your ratio.

Even worse, there’s no law stopping credit card companies from dropping your credit limit below the amount you currently owe. If that happens, you can get hit with overage charges immediately. The only protection you have against those sorts of fees is to carry only minimal balances. If you spot such a change on your credit card statement, it’s more than worth your while to call up your credit card company and ask to have your credit limit raised at least to the same level as your current balance. You can also ask to have the charges removed, but there’s no real guarantee.

Some credit card companies have gone so far as to cancel credit cards. While that seems mostly focused towards accounts that haven’t been used in a while, they do seem to be targeting individuals with high balances, especially if they live in areas hit hard by the housing downturn. That group is considered especially risky right now and have also been a significant portion of the credit card accounts with lowered balances or higher interest rates.

Remember, your bank or credit card company does have to notify you in writing of any changes they make to your account. This is a time to be especially diligent about opening your credit card statements, as well as any other mail you receive from your lender. I know more than a few people who just shred their bills, especially if they pay online. Now is probably not the best time to be using that method.

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