At a moment’s notice, your credit card issuer can lower your credit limit.
During COVID-19 and the economic crisis that followed, some credit issuers did just that—scaling back on credit limits offered to new customers and lowering limits on existing customers. That’s because with many people losing jobs and income, lenders are concerned that consumers may overextend themselves by spending more on credit cards than they can afford to pay back.
So what can do if your credit issuer decides to trim your limit? And what would make them decide to do that to you?
Learn the ins and outs of any unexpected changes in your credit limit, and how to deal with it if your credit card company lowers your credit card limit without warning.
How Your Credit Limit Is Determined
There are several factors that determine your credit card limit. First, the type of card plays a major role. Some credit cards only allow a standard credit limit across the board, regardless of the cardholder’s credit score, income, or other financial detail.
Other cards offer a credit-limit range. Cardholders with lower incomes, credit scores, and bad credit histories would be on the lower end of the range, while cardholders who are more qualified would get the higher amounts.
Because of COVID-19, credit bureaus are allowing free weekly online credit reports via AnnualCreditReport.com from now through April 2021. This provides a big-picture look at your credit history and activity so you can make improvements.
Can They Cut My Credit Limit Without Warning?
Credit card companies can slash your credit limit for a variety of reasons. While the Credit Card Accountability Responsibility and Disclosure Act of 2009 provides protections related to interest rates and fees, it doesn’t prohibit credit card companies from lowering credit limits without warning.
“Generally, when you see a lender reduce a credit limit, there were indicators that the person may have trouble paying their debts,” Rod Griffin, senior director of public education and advocacy for Experian, told The Balance via phone. “It’s a way for (the lender) to protect against losses.”
Reasons why card issuers might reduce credit card limits without warning include:
- Late payments
- If the issuer wants to reduce the overall amount it’s letting customers use
- Carrying a higher balance than normal
- If your card is inactive
If you fall behind on payments or your debt increases to a level that the credit card company deems risky, lowering your limit restricts your ability to rack up debt. Lenders can also reduce your credit limit if they’ve given out too much credit and need to tighten up their lending. Lastly, if you barely use a card, an issuer may be more likely to cut the limit so that you’re not tempted to run up the whole line during a difficult time.
Anytime a credit card company suspects that you may not be able to pay back what you’re borrowing, cutting your limit is a possibility. A good example of this has played out during the coronavirus pandemic. Creditors are most likely looking more carefully at cardholders’ spending patterns, and, if there are significant red flags, credit limits could be lowered.
Read the fine print of your credit card agreement—it may give specifics on the issuer’s policy when it comes to reducing or increasing credit limits.
Will a Credit-Limit Reduction Hurt My Credit Score?
If you rely on your credit cards to pay important monthly bills, a sudden decrease in available credit could mean the next bill you pay might push you past your credit limit.
A sudden decrease in credit can also have another negative impact on your financial life: increased credit utilization, which is the second most important factor in determining your credit score.
Utilization refers to how much you owe as compared to your credit limit. For example, if you have a credit limit of $1,000 and owe $300, you are utilizing 30% of your credit. If you maintain the same balance but the credit issuer cuts your credit limit to $500, your utilization jumps to 60%.
How much can a slashed credit limit tank your credit score? In general, the higher your score to start, the bigger the point change you might see, Griffin said. More important than the total number of points, however, is whether the score change impacts your ability to qualify for other loans and credit cards.
“If your scores are in the low 700s, a change of even 20 points can be meaningful in terms of qualifying for the best rates,” Griffin said.
Whereas if you have a score of 800 or above, Griffin said a 30 to 40 point drop won’t really have much effect since the score would still be in the “Excellent” range.
What Should I Do if This Happens?
If your credit card company does suddenly cut your credit limit, there are some simple steps you can take.
Call Your Card Issuer and Ask Why Your Limit Was Reduced
Call the customer service number on the back of your card. Be polite but direct. Ask the phone rep to tell you why your credit limit was reduced and what you can do to change it.
“As a consumer, you always have the right to contact the lender and ask, ‘Why did you do it?’” Griffin said.
Plead Your Case
Bring up any metrics that reflect your reliability as a borrower, like good payment history, high credit score, or healthy income. Request that the issuer reinstate your previous credit limit. Anything that works in your favor is fair game for pleading your case. It’s not a guarantee that the phone rep will change your limit, but making a convincing (and respectful) case doesn’t hurt.
Decide What Your Next Move Will Be
The issuer may decide to restore your credit limit if you’ve been a good customer. Or, they may not. You can accept the new credit limit and, over time with responsible card use, it will likely increase again. If you’re not satisfied, you can consider opening a new card and transferring your balance.
Your credit card company may periodically increase your credit limit if you prove to be a responsible credit card user and always make your monthly payments on time. You can also request a credit limit increase from the issuer.
How to Avoid a Credit-Limit Cut
The main ways to avoid a credit-limit cut are to pay your bill on time every month and keep your utilization low. Experts suggest using no more than 30% of your available credit limit. Good credit management is a sign to your issuer that you aren’t a big risk and that could help you avoid a limit decrease if the issuer decides to lower limits across the board.
Dealing with sudden changes to your credit card account can be tough. Even if you have a temporary decrease to your credit limit, continue to manage your credit as best as possible. Over time, you should have an opportunity to get an automatic limit increase or successfully ask the issuer to raise your limit.
- Keep tabs on your credit and utilize free credit report sites to know your credit history.
- Set up alerts that let you know when you’re approaching a certain balance on your credit cards. When you’re getting close to that balance, cut back to keep your utilization low.
- Work with your lender early and often. Especially during times of economic crisis, credit issuers may be more willing to work with you.