- There are many reasons why a credit card issuer could decide to reduce your credit limit, from a change in your spending habits to missed payments.
- You should never charge anywhere near your spending limit on your cards; ideally, you’ll keep your utilization ratio under 30%. But having a higher credit limit is an important factor in improving your credit score.
- Credit utilization accounts for 30% of your credit score, so the higher your credit limits across your accounts, the better your utilization ratio will look (assuming you keep your balances low).
- If your credit line decreases, call up your issuer to ask why and see what you can do to bring it back up. They may be willing to accommodate you after you pay off a balance or clear up an issue like an error on your credit report.
- See Business Insider’s list of the best credit cards.
You’re cruising along with your favourite credit card when you get a notification that your credit limit’s been lowered. Say what?
The above scenario happened to a friend of mine who had enjoyed the use of his credit card, made regular payments, was not over the limit, or ever late with a payment. His credit score dropped 30 points.
So why would a creditor suddenly lower your limit? Here’s what we found out, and what you can do about it.
Creditors can lower your spending limit
Just as creditors can reward you for your excellent payment history and loyalty with a random, fat credit increase, they can punish you by lowering your spending limit. The reasons can vary, but most are based on the fact that the creditor suddenly views you as an increased credit risk – or a high risk of defaulting on the card.
Banks can even collectively reduce the limits of multiple card holders to reduce their risk of exposure during an economic downturn or uncertainty, though this is rare.
Reasons your credit limit may be lowered
- Your spending habits changed. If you haven’t used your credit card in a while and then all of a sudden start charging a lot, or you’ve always paid the balance in full and now you’re carrying a balance, those changing habits may be a red flag that results in a lower credit line.
- Your credit score dropped. If you’ve had a decline in your credit score for whatever reason – too much debt, too many hard inquiries, or closed accounts – a credit card issuer could view this as a reason to lower your limit.
- You stopped using the card. Creditors want you to use their card, and after a certain period of inactivity they can lower your limit.
- Someone stole your identity. If someone opened other cards in your name or is on a spending spree under your stolen identity, you look like a risky borrower.
- There’s an error in your credit report. An error like a missed payment or a collections debt has surfaced on your credit report unbeknownst to you. The response is a lowered limit.
- You’re behind in other payments. You can’t just keep one card in good standing; all your creditors must be paid on time because creditors can look at other accounts you have and how you’re managing them. If they see something they don’t like – late or missed payments, for instance – they can lower your limit.
- You missed a payment with that creditor. This change can spark a creditor to drop your limit, thinking you must be going through a financial hardship and are an increased credit risk.
- You’ve gone over the 30% utilization rate for that card. Creditors prefer you to keep your balance below a 30% utilization rate for each credit card balance you maintain. Likewise, your credit score will be higher when you keep balances below 30% of available credit. If your card went over that 30% utilization, the change may provoke them to lower your limit to prevent an even higher utilization rate.
What can you do if your credit line decreases?
While it seems unfair that a creditor can lower your limit and likely your credit score (check to be sure), there are some things you can try to get your card issuer to reconsider. The Fair Credit Reporting Act requires a lender to notify you if the lowered limit is a result of information based on your credit report. Check your report semi-annually to help uncover any errors and report them right away.
What’s more, certain provisions protect you from over-the-limit fees if your card becomes maxed out within 45 days of the lowered limit.
Restoring your credit limit
Call up the creditor and ask for an explanation of why your limit has been lowered. If the reason is your credit score has dropped, you’re behind in other payments, or you missed one of your payments to the creditor, explain the situation and your plan for getting back on track. Ask them what you can do to restore your limit. You may have to pay off a certain amount, or have no late payments for six months, for them to consider raising your limit again.
If the reason turns out to be an error or stolen identity, you’ll have to contact the three credit bureaus – Experian, TransUnion, and Equifax – and report and dispute the error in writing. You’ll then need to dispute the error with your creditor and let them know that as soon as your report is fixed you will contact them so they can look again, and hopefully restore your previous limit.
If the reason is that your spending habits changed or card inactivity, you may need to explain what’s going on – you used the card for a medical or dental emergency, for instance – and what your plan is for paying off the balance, or ensure them that you will use the card again.
Finally, if the reason your limit was lowered is because you’ve gone over your 30% utilization rate, the creditor may request you get back under it by making a significant payment by a certain date. If that’s not possible, see if you can make a plan to pay off a certain amount in say, three or six months and ask if they will consider restoring your limit once that is complete. This turned out to be the reason for my friend’s lowered limit, and his creditor offered him a deal to get the balance back under the 30% utilization rate.
Keeping your limits high
While it’s not that common to have a creditor lower your limit, you can usually try to advocate for yourself by contacting them, explaining the situation, and/or correcting it. If your creditor refuses to work with you, you can file a complaint with the Consumer Financial Protection Bureau.
The best way to prevent a lowered limit is to pay balances in full each month, stay below your 30% utilization rate, and use your card occasionally to keep it active. Regularly monitor your credit report and keep your credit score high.
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