It is little secret that credit card debt has skyrocketed in the past couple of years. In fact, credit card debt has grown by a whopping 13.08% in the past year (despite a rare decrease in the first quarter of this year).
Similarly, it’s no surprise that credit card delinquency rates have also risen. According to the Federal Reserve Bank of NY, about 9% of card balances fell into delinquency over the last year. NPR explains that this stat is “a sign that a growing number of borrowers are feeling the strain of rising prices and high interest rates.”
While debt and delinquency rates often go hand in hand, it may surprise you that being overextended on your card(s) may also lead to decreases in your credit limits. Given current consumer debt challenges, it is little wonder that there have been significant line decreases in the past year. The good news is that while decreasing your limit affects your purchasing power and can adversely affect your credit score, there are ways to minimize the impact of a cut.
Why do issuers decrease credit card lines?
Lenders may cut your credit line for several reasons. According to Rod Griffin, senior director of consumer education and advocacy for Experian, the good news is that this doesn’t necessarily mean you did anything wrong or that you are a significant credit risk.
For example, bad economic conditions (that have nothing to do with your personal finances) can lead to lines being lowered as issuers seek to limit their risk.
Other reasons can be directly related to your individual situation and may have nothing to do with how responsibly you use credit. For example, if you stop using your account for an extended period your account may become inactive and your issuer may cut your line. Another similar culprit can be a loss of income.
Griffin notes that other related reasons can involve changes in your credit behavior. As you might expect, a drop in your credit score can adversely affect your line(s). Other related specific examples include over-the-limit charges, increasingly high card/loan balances, and multiple late payments.
Beverly Harzog, credit expert and podcast host of “Your Personal Economy,” adds that “a late payment is a red flag for your card company. They begin to worry that you’re having money problems, so they might decrease your line to minimize future risk.”
BONUS TIP!
Has your credit limit been cut and you have no clue what caused it? You can always call and ask your lender for an explanation. Similarly, if you’re comparison shopping for a new card, it’s helpful to know what factors determine your initial credit line.
How do credit card line reductions affect your credit score?
A credit line decrease can negatively impact your score primarily through your credit utilization ratio. Griffin explains that “this ratio compares your credit card balances to your available credit limit. When your credit line is reduced, your utilization ratio may increase, which can hurt your credit score.”
If the reduction significantly raises your total utilization ratio (across multiple accounts), you will likely see at least a temporary drop in your score. This is because your credit utilization ratio accounts for 30% of your FICO® Score.
“When your available credit goes down, your utilization ratio will go up,” says Harzog. “Once your ratio exceeds 30%, it hurts your score.”
While ratios over 30% might not tank your score, ideally, the lower your ratio, the better.
If your ratio increases, Griffin advises that you actively manage your balances and keep them as low as possible. Doing so can help you mitigate the negative effects and help you maintain a healthy score.
➤ SEE MORE:Widening interest spreads are increasing the cost of bad credit
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Actively monitoring your credit is always a good idea whether your line gets cut or not and can help financially empower you. You can get copies of your credit reports for free and free credit monitoring from Experian which can alert you to changes in your credit.
What should you do if you have your credit card limit cut?
If your line is lowered, don’t panic. In fact, in certain situations, a line cut isn’t always a bad thing.
Griffin notes that “it depends on your individual circumstances. For example, for some consumers, a reduced line can serve as an incentive to improve financial management and reduce debt, or lower the risk of overspending.” Harzog opines that if you’re an impulsive spender, having a lower limit—or even no card at all—is actually preferable (in order to avoid debt).
Griffin also points out that if you aren’t using anything near your limit, a decrease may not have any effect on your score because there would be minimal change in your utilization rate calculations.
Finally, you should bear in mind that a line reduction may only be temporary.
The following action steps can help you minimize the impact:
- Contact your lender to find out the reason(s) and to see if there’s an opportunity to have your line reinstated. “If it’s a situation you can fix such as a late payment, explain you’ve put structure in place to be sure you pay your bills on time,” advises Harzog.
- Pay down existing balances on other accounts to improve your overall credit utilization ratio. Doing so can help offset the impact of having your line cut on one individual account.
- Lower your spending. Reducing your spending can help you lower your credit utilization and negate the impact of a lower limit on your score.
- As noted above, sometimes your issuer may cut your limit due to inactivity. If this happens, simply call and say you intend to use your card more going forward, even if it’s only on occasion.
Taking these steps can help manage the impact of a line decrease and support your overall credit health.
BONUS TIP!
Requesting an increase in your limit is not advisable right after a line cut, but is generally a good idea to do after responsibly using your card for six to 12 months after a cut. Some issuers also grant automatic line increases if you show responsible account behavior.
How can you proactively avoid having your credit limit lowered?
The old saying “an ounce of prevention is worth a pound of cure” certainly applies to this topic. The following action steps can help you avoid having your line lowered in the first place:
- Griffin claims that “consumers can avoid credit line reductions by maintaining good financial habits and demonstrating responsible credit usage.” This includes making your payments on time every time and keeping your balances as low as possible.
- Actively communicate with your lenders if you anticipate having any difficulty making payments or going over your line. They may offer temporary relief options, such as a payment plan or forbearance. Harzog implores consumers to not wait until after their due date. There’s no shame in reaching out when you’re in a bad situation.
- Pay at least your minimum required payment by the due date. Set up automatic payments or email or text alerts. Harzog adds that a late payment can damage your score and this can be another reason your limit may be lowered.
- Consider making more than two payments a month. Biweekly payments can improve your ratio and lower your debt.
While having your credit limit lowered isn’t normally a welcomed thing for most consumers, it certainly isn’t a death sentence. It’s very important, however, to be proactive. Review the reasons for the cut and take appropriate actions to maintain and improve your creditworthiness.
