If Asked, Don’t Tell

Editor’s note: This article is part of our “Debt Free” series, a Next Avenue initiative made possible by a grant from the RRF Foundation for Aging.

Credit card issuers routinely ask cardholders to update their incomes, but do you have to tell them? What if your income has dropped?

No, you don't have to tell them. (They do have to ask; it's usually a matter of internal compliance. You also have to tell a card issuer your income on your initial application or if you apply for a credit limit increase.)

If you've decided to leave a salaried job to freelance, start a business or retire, the question can feel scary, or creepy, like they had a spy at your going-away party.

But the only wrong way to answer, if you answer it all, is to knowingly lie. (That can be considered fraud.)

While your W-2s or 1099s may be lower than they once were, that does not necessarily mean your credit limits will drop. Also, keep reading and you'll likely see something like this:

Author and credit expert Gerri Detweiler of Plainwell, Michigan, says card issuers at certain intervals ask the question of every customer with a similar profile.

Credit card issuers are not necessarily looking to limit what you can charge. They may instead hope you qualify for more of their products. "An updated income can result in an increase in buying power, especially if you want to make a major purchase and are unsure of your capacity to do so," says John Ulzheimer, a credit expert in Atlanta who has worked for both the credit bureau Equifax and the credit-scoring company FICO.

Ulzheimer points out that American Express even has a "Check Spending Power" feature that can authorize you to spend over your current credit limit for a major purchase. (And why might you do that? Well, a lot of adults use credit cards to earn points or cash back. High credit limits allow us to charge more and rack up more rewards, actually shelling out less for things like travel.)

Credit expert Beverly Harzog of Alpharetta, Georgia, host of the Your Personal Economy podcast, says you can be strategic about whether to answer: "If your income has gone up, it could be to your advantage, especially if you want a credit limit increase or access to new credit products," she says. "But if your income has gone down, it might be best just to ignore that."

If you are uncertain about what your "income" should be, given the complexities of multiple income streams, you might want to consider calling the card issuer and explaining your situation, says Harzog.

Credit card issuers could lower your credit limit, yes. They can lower it at any time, for any reason, Ulzheimer points out. But they are also businesses that like to keep good customers happy.

Detweiler says she's not heard of creditors lowering people's credit limits because they have retired. But certainly, if you volunteer information about a lower income, that's a risk. (But, unless you are requesting a higher credit limit, you don't have to share updated income information.) And there are definitely things you can do to reduce the risk of your credit limit being reduced.

The typical reasons credit card issuers lower customers' limits are:

• You rarely or never use your card.

• You have maxed out your card.

• Your credit score falls, suggesting you may be overextended.

• They are adjusting their lending portfolios, or the economy looks uncertain.

Those are mostly within your control. And you may already have generous credit limits, so that if a card issuer reduces the limit on one card, your combined credit limit is still plenty high. Unused "room" on your credit cards helps your credit scores, though. The reason you want to keep high credit limits is because credit scoring algorithms punish you for using large portions of your available credit.

A big part of your credit score is related to how much of your credit limit you actually use. Even if you pay your credit card bills in full every month, using more than about 30% of your credit limit can hurt your credit score. Scores look at the balance on each card and all cards and compare them to your credit limits. Lower balances are better, until you get to zero. Not using a credit card at all will not help your score and will increase the risk that the card will be canceled or your credit limit will be reduced.

If you have other cards with higher limits, it may not affect what you are able to spend. But if you have just one or two cards, the impact could be bigger. There's no harm in calling your credit card issuer and asking if the higher limit can be restored.

If you need the higher limit because you were carrying a balance or you have few credit cards, a personal loan or new credit card could help restore your spending power.

You can save yourself a lot of grief by at least glancing at the email and postal mail your card issuers send.

Here's how that saved me from a credit limit cut: I cast aside a favorite, well-used credit card for a few months last year in favor of a new airlines reward card and then a new hotel rewards card that offered bonus rewards points after a certain minimum spend.

I temporarily removed my old, reliable cash-back card from my wallet in favor of the shiny newcomers. And my old, reliable card issuer sent me an email indicating my credit card limit would be cut by about one-third because it appeared my usage needs had dropped — unless I requested within 30 days that my old limit be restored. I did. (Lesson learned.)

Bev O’Shea is a freelance writer specializing in personal finance topics. She is a mother of two adult children and lives in Georgia with her husband, cockapoo and calico. Read more of her work at bevoshea.com Read More