Finding out your credit limit has suddenly been cut may be quite the surprise, and not in a good way. Not only does a lower credit limit mean less purchasing power, but it can increase your credit utilization ratio. This can lead to a sudden drop in your credit score, even though you may have done nothing wrong.
If you are not happy with the decreased limit determined by your credit card issuer, you do have the right to ask that it be increased. If they don’t oblige and return your credit limit to what it was, you can still take action. Read on to understand why your credit limit may have been reduced and options you have to restore your available credit.
Reasons your credit card issuer may lower your credit limit
Understanding why your credit limit was lowered can help you figure out what to do next. Depending on your card issuer and situation, the following reasons could be behind the decision.
Missed or late payments
If you’ve missed credit card payments, or are late in paying them, your credit card issuer could react by cutting your credit limit. This makes sense considering late payments can show card issuers you’re struggling to keep up — and that you could be at a higher risk of default.
High balances or frequent requests for more credit
Carrying high balances on your existing cards can signal higher risk as well, prompting issuers to lower your limit. If you’re constantly maxing out credit limits and/or trying to access more available credit, that can be a huge red flag for issuers.
Low or inconsistent card usage
If you don’t regularly use a card or you never use it, a card issuer might decide to close your account or lower the limit. This doesn’t mean you did anything wrong — it means your card issuer decided to limit their own risk.
Changes in your financial profile
Monica Eaton, spokesperson for chargeback management service Chargebacks911, says that a cardholder’s income and wealth can also play a significant role in credit limit cuts. Unfortunately, the parameters for credit line changes aren’t exactly cut and dry.
“Other factors might include your employment history, spending habits, debt as a percentage of your income, any limits or restrictions on other credit cards and monthly expenditures,” she says.
Broader issuer risk decisions
Sometimes, credit limits are reduced even without negative activity. The decisions can be arbitrary, or they can be based on overall economic issues or concerns.
Credit lines are also more likely to be cut during times of crisis.
According to a Consumer Financial Protection Bureau (CFPB) report, card issuers showed considerably more credit line decrease activity during the Great Recession and the COVID-19 pandemic.
How banks evaluate risk
As Eaton explains, issuers assess multiple factors when managing credit exposure. “Banks are for-profit businesses. They want to invest their resources in customers who provide a positive return, based on a range of risk and reward variables.”
That said, banks don’t want to curtail their customers’ spending — even if they occasionally lower consumer credit limits.
“Big spenders generate big profits, but to a bank, it’s all a risk/reward calculation, so your credit card issuer may lower your spending limit when they perceive an elevated risk,” she notes. “This includes things like missing your payments — or being habitually late.”
➤ SEE MORE:How surging credit card delinquency rates can affect credit limits
How can a lowered credit limit impact your credit score?
Your credit score is calculated based on several factors, including your credit utilization ratio. “This refers to how much credit you are using at any given time,” explains Andrea Woroch, a personal finance expert.
“Those who carry higher balances will have a high credit utilization rate which will negatively impact your score since this makes you look like a riskier borrower.”
When a credit card issuer lowers your credit limit, it reduces how much available credit you have and thus could negatively impact your overall credit utilization rate, so your score gets a ding, she adds.
As an example, imagine you have $2,000 in debt on a card with a $10,000 credit limit, which gives you a credit utilization ratio of 20% on that card. If your card issuer decides to lower the card’s credit limit to $5,000, your credit utilization ratio would increase to 40% overnight.
If you have multiple accounts and/or don’t utilize much of your credit to begin with, a credit limit reduction likely won’t impact your credit much. As long as you’re using less than 30% of your overall credit, you should be in good shape. Ultimately, this means making sure you carry less than $1,500 in debt for every $5,000 in credit available to you.
➤ FREE TOOL:Credit utilization calculator
What to do when a credit card company lowers your credit limit
As a cardholder, it’s your right to ask that your credit line be bumped back up. Here are some steps to try:
- Call your card issuer. Reach out to your credit card company and try to negotiate a credit limit increase. The worst they can do is say no.
- Submit an online request. Send a request online via email or through your credit card portal requesting that your credit line be reinstated. Again, you have nothing to lose by asking.
- Get another credit card. Consider opening a new credit card, as you can gain more credit through a new line of credit. “Just make sure you are paying attention to how much you’re spending when using multiple accounts as it’s easy to lose track this way, which can dig you into debt,” cautions Woroch.
How can you restore your card limit?
In addition to the tips mentioned above, you can try to restore your credit limit by managing your credit card account properly. This means making on-time payments, paying more than the minimum due and using the card regularly. You can also restore more of your card’s limit by paying down your existing balance.
As we mentioned, getting approved for a new credit card is another way to make sure you have access to more credit if you need it. When opening a new credit card, however, be sure you’re getting a robust rewards program and good sign-up bonus, says Woroch.
➤ SEE MORE:Is an automatic credit limit increase a good thing?
