The credit crunch has spread far beyond mortgages, affecting all kinds of financial products. Credit cards are no exception: nearly half of American banks cut their customers’ credit limits in late 2008, a trend that will almost certainly continue. This Bloomberg story has some good advice:

If credit-card limits are decreased, consumers should pay off balances as quickly as possible, consider making online payments before the monthly statement arrives to reduce debt and weigh transferring balances to a card with a lower rate, said Jeff Blyskal, a senior editor of Consumer Reports. Blyskal, who is based in San Francisco, said consumers should beware of teaser rates and high fees when transferring balances.

So why are banks lowering credit limits? As the economy gets worse, and unemployment rises, more and more people are defaulting on their bills:

American Express’s charge-off rates of loans rose to 8.29 percent in January from 7.23 percent a month earlier, a 15 percent increase, based on Bloomberg data. Chase’s charge-off rates increased to 5.94 percent from 5.32 percent, a 12 percent jump.

Even people who have never missed a payment are at risk of losing their access to credit, as these charge-offs hit banks’ balance sheets at an already-tough time. Meanwhile, a new round of credit card reforms could actually make the problem worse, as the industry is still adjusting to new rules the Federal Reserve implemented in December of last year. From today’s Politico:

The lenders also warn that tougher action by Congress might backfire and force lenders to tighten credit just when consumers need it most.

“There is a serious risk that such actions could end up hurting the very people they’re trying to help because it limits the ability of card companies to lend to consumers and small businesses at the very time they can least afford it,” said Ken Clayton, managing director of credit card policy for the American Bankers Association. The trade association is leading the industry’s efforts on the credit card issue.

The bad economic environment has driven up the cost of credit card lending, despite what the Federal Reserve has done, Clayton argues.

For ordinary consumers, what does this all mean? First of all, don’t rely on just one credit card. Cards can be canceled without warning, leaving you without options. And if you already have several cards, don’t let them go unused for too long, as inactive accounts are more likely to be closed. Finally, keep in mind that if you’re running up against your credit card limit, you likely have less expensive options than an overdraft fee on your checking account.

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