You’ve probably noticed that when your credit card company makes certain changes to your card’s terms, you get a written notice. However, if your card issuer reduces your credit limit, it usually happens without warning.
When a lender decreases your credit limit by surprise, what can you do about it? And how does it affect your credit score?
In this article we’ll discuss why your card issuer can reduce your credit card limit, how it can affect you and what to do about it.
How are credit limits determined?
When you first apply for a credit card, lenders look at several factors to determine your credit limit. Their aim is to get a handle on your ability to pay money back and determine how suitable you are to receive credit.
To do this, they’ll review your credit report, credit score, repayment history and household income. With your credit report, for example, lenders learn how much debt you have, whether you’ve had any late or missed payments, and other clues of your creditworthiness.
Borrowers with missed payments, higher debt-to-income ratios and lower credit scores might get lower credit limits. However, borrowers with better credit histories may receive higher credit limits.
If you don’t know your credit limit, you can check it in your latest billing statement. The amount will be current as of the date of the statement, so it won’t include any recent purchases or payments you might have made since then. You can also call the number on the back of your card to get your limit from your credit card’s customer service.
Why did my bank lower my credit limit?
Credit card companies monitor your credit on an ongoing basis, not just when you first open an account. So once a lender sets your initial credit limit, it can reduce it without warning.
Some of the reasons why your lender might reduce your credit limit are:
1. Changes in spending habits
Credit card companies track your transaction information. If they notice a significant change in your spending behavior, it may raise a red flag. This can include changes in the types of stores you frequent, the amount you spend and how often you pay with the card.
Other aspects of your credit behavior includes whether you carry a balance month-to-month or pay in full within your credit card grace period.
2. Late or missed payments
Late or missed payments on your account may spell financial trouble. Your credit card company can’t tell if you simply forgot or are having difficulties paying. As a result, they may decide to lower your credit limit.
3. Increased credit utilization
Your credit utilization ratio is your total revolving debt – which includes credit card and store card debt – divided by your total available credit across all your cards. When this ratio exceeds 30%, it can put pressure on your credit score.
Credit card issuers can check your outstanding balances with other cards because they have access to your credit report. If you start borrowing more with your credit cards, you’ll increase your credit utilization ratio. This may cause your issuer to cut your credit limit.
4. Low credit utilization
Card inactivity can impact your credit limit. If you haven’t been using your credit card for a while, your credit card company can lower your credit limit. Even if you’ve made all your payments on time, your issuer might still reduce your credit limit if you’re using only a small portion of your available credit.
5. Bad economy
Banks tend to tighten their credit standards during bad economic times. When unemployment increases, people can miss payments and become delinquent.
Credit card issuers can scale back credit limits during difficult economic times to lower the risk of incurring losses.
Credit card companies can reduce your credit limit at any time
Your issuer can reduce your credit limit at any time, and oftentimes the change comes without advance notice.
While the US congress has passed legislation such as the Credit CARD Act of 2009 to prevent abusive practices, a change in your credit limit, whether up or down, doesn’t require notice.
There are some exceptions, though.
For example, if your card issuer decreases your credit limit and causes your balance to exceed the new lower limit, it can’t charge you penalties at once. The company must notify you at least 45 days before imposing an over-the-limit fee or a penalty rate as required by federal regulation.
When your lender lowers your credit limit, the proportion of credit you’re using increases and your credit utilization ratio goes up. This might cause your credit score to go down.
What can I do next?
If your card issuer cuts your credit limit unexpectedly, there are some steps you can take next:
1. Call your credit card company
As a first step, call the number on the back of your credit card and ask the company to reconsider the new limit. Can they increase it back?
If they don’t agree to move your limit back up, find out the reasons behind the change and address those concerns. You’ll have a better understanding of the issues you need to focus on and resolve.
2. Check your credit report for errors
Request your credit reports and check them for any errors. You’re entitled to a free copy of your credit report every year from Experian, TransUnion and Equifax – the main credit bureaus.
Errors can drag down your credit score and trigger a reduced credit limit, so it makes sense to monitor them regularly. You can get your free credit reports at AnnualCreditReport.com.
3. Don’t let your credit card become dormant
It may sound counter-intuitive, but your credit limit can be lowered simply because you aren’t using your card. Yet transaction activity is important. Credit utilization makes up 30% of your credit score.
So when it comes to your credit card, some use is better than no use at all. Card inactivity can lead to a lower credit limit or to your account being closed.
4. Rotate your credit cards
The upshot of the above point is that If you own several credit cards, try to rotate them. This can prevent card inactivity and help with your borrowing limits.
One way to keep your card active is to use it to pay for monthly subscriptions. Just keep the charges small and manageable. Setting up automatic pay can help you avoid late payments.
5. Pay on time
Paying your credit card bill on time shows your ability to manage credit responsibly. It can help keep your credit limit from sliding further.
How does a lower credit limit affect your credit score?
A decrease in your credit limit will make your credit utilization ratio go up. According to myFICO, when a person has a high credit utilization, it can indicate that a person is more likely to make late or missed payments. So a reduced credit limit might cause your credit score to go down.
Your credit utilization ratio relates to the amount of revolving debt you owe at a particular point in time (such as credit card and store card debt). It’s calculated by dividing your revolving debt by the total credit limits across all your cards. Consider the following example.
Say a person owns one credit card with a credit limit of $4,000 and a balance of $1,000. In this case, the credit utilization is 25% or $1,000 divided by $4,000 (that is, 0.25). But if the card’s credit limit is cut from $4,000 to $2,500, the credit utilization rate goes up to 40%, a level that can impact a person’s credit score.
Ways to minimize the impact of a reduced credit limit
Sometimes, despite your best efforts, your credit card issuer won’t reinstate your original credit limit. To reduce the impact on your score, consider the following steps.
1. Ask for a credit increase on your other cards
Asking for a credit increase on your other cards might cushion the impact on your credit score. If approved, the higher limit will help lower your credit utilization.
And most credit card issuers have a simple online process to request a credit limit increase. If you’ve been responsible with your other cards, ask for a limit increase.
2. Pay down your credit card debt
Paying down debt will help your credit score by reducing your credit utilization. It’s a recommendation that’s sometimes easier said than done. But if you can, pay down your balance.
Paying down debt is a proven way to improve your credit score relatively quickly.
3. Consider opening a new credit card
If you can’t increase your credit limit on your other credit cards, try opening a new one. The credit limit on the new card will increase your total available credit and lower your utilization.
But be cautious. If you shop for a new credit card, avoid making multiple applications.
When you apply for a new credit card, your credit score falls temporarily. Multiple applications can have a more lasting impact on your score since each application generates a hard credit pull when the lender checks your credit. It’s worth spending some time figuring out which type of credit card you should get first and then apply.
4. Don’t close your old credit card accounts
A reduction in your credit limit may come as a shock. And once the surprise subsides, it might cross your mind to take your business somewhere else and close your account. But if you decide to transfer your balance to another card, don’t close your account.
When you close a credit card account, the credit limit of that account stops counting in the calculation of your credit utilization, driving it higher. And that can hurt your credit score.
Also, if you transfer a balance to another card, avoid losing that credit card’s grace period.
How fast can my credit score recover?
Credit scores never stand still and change as your credit behavior changes. So if your credit score falls when your credit limit is cut, you can help it recover by taking the right steps. Making your payments on time and reducing your debt are time-tested ways to help your credit recover.
It might take a few months, but your credit score can recover.
Now that you’ve learned some of the steps you can take when your credit card company lowers your credit limit, put them to work.
The reduction in your credit limit might have come as a surprise, but now you have a better sense of what to do next.
Federal regulations do not prevent lenders from changing your credit limit – whether up or down – at any time.
Lenders don’t have to provide you with advance notice when they change your credit limit. However, if you go over your new lower credit limit as a result of the reduction, they must provide a 45 day notice before implementing any penalties.