When you first open a credit card, your credit limit is based on your credit score at that moment. If you maintain a high score, make payments on time, and use credit responsibly, your credit card company may decide to raise your credit limit. What many do not know is that the inverse is also true. If your credit score drops, a card issuer can lower your credit limit.
Reasons a Lender Might Lower Your Credit Limit
The main reason a credit card company might lower your credit limit is to control their risk, which has been a major concern for lenders since the 2008 crash. If it looks as if you pose a greater risk of NOT repaying your debt, they may lower your limit. “Risk triggers” include collections accounts, late payments, using a large percentage of your available credit, and negative public records, such as foreclosure. Other risky behaviors include exceeding your card limit, excessive credit cash advances, or bouncing checks.
If you want to ensure that your card issuer will not lower your limit, you should control your risky behaviors. Keep your debt-to-credit utilization level low by using a maximum of 30% of your available credit. Make sure you make all payments on-time.
Why is a High Credit Limit Important?
There are a number of reasons to maintain the highest credit limit possible. First and foremost, your credit limit can impact your score. 30% of your credit score is determined by your credit utilization. As mentioned above, to maintain a high score, you want to use less than 30% of your available credit. The lower your credit limit, the harder this is to do.
Additionally, if you are already nearing your credit limit, your card issuer may cut your limit to below your current balance, which could have disastrous consequences. Not only would your credit score drop, you may be charged penalties and an increased interest rate for going over your limit.
What to do if Your Limit is Cut
First, contact your credit card issuer to see why they decided to lower your limit and ask if there is anything you can do to get them to increase it. During this conversation, give them any information you can that will prove you are not a risky borrower, including a positive payment history, salary increase, the amount you have in savings, etc. While the customer service representative may not be able to increase your limit, they may be able to lower your interest rate, waive fees, or do something else to keep you as a customer.
If you have good credit, and your current card company is not doing anything to help you, you may want to shop for a better credit card. You may be eligible for a card that will offer you 0% APR on balance transfers. Before applying for the new card, though, put together a plan for paying off the balance during the grace period and make sure you are shopping for the best card.
If you decide to keep your current card, make sure you read every new statement. When your limit is dropped, it means your minimum payment may also change, so make sure you check this, particularly if you use automatic monthly payments. If your current auto-payment does not cover the new minimum payment due, you could incur fees and penalties.
Whatever you do, do not close your account out of frustration. This could lower your credit score in a number of ways. First of all, it will further damage your credit utilization ratio. Secondly, another important part of your credit score is the length of time accounts have been open. If you close an old account, it will lower the average age of your accounts.
If your credit card company has lowered your balance, now may also be a good time to pay down your debt. If you have been coasting on the minimum payments, take a look at your budget to figure out if you can afford to put more money toward your debt. This will lower your debt-to-credit ratio, which will increase your credit score and improve your overall financial picture.
Conclusion
Credit card companies are not required to notify you if they decide to decrease your credit limit. One exception to this rule is if the lower limit will put your balance over-the-limit. If the lower credit limit will result in fees or penalties, the card company must give you 45 days’ advance notice.
Because your limit could be lowered without notice, it is a good idea to monitor your monthly credit card statements so you will know right away if your limit has dropped. This is good practice anyway, as it is also a good way to find fraudulent charges and fight them in a timely fashion.