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During the Great Recession of 2008, 62 percent of credit card issuers decreased consumers’ credit limits without warning. Whether due to economic shifts or other factors, credit limit reduction can happen unexpectedly, putting your credit score and purchasing capabilities at risk.
Continue reading for tips on how to avoid credit limit reduction and what to do after a credit limit decrease.
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If you are looking to proactively keep your credit limit and spending potential as high as possible, it is important to learn why your bank may choose to lower your credit limit. Remember that a credit provider may choose to reduce your credit limit for global reasons outside of your control. However, your choices are the biggest influence on your credit limit.
Factors that can lead to a lower credit limit include consistently late payments or missing payments, high credit utilization, decreased income, negative credit history, credit card inactivity and changes in creditworthiness. Fortunately, you can preserve your credit limit by following these five steps.
The following five best practices apply to anyone looking to maintain good financial health—but they are especially applicable to those who want to avoid a decreased credit limit.
The most important thing you can do as a responsible borrower is to make at least the minimum payment each month. This applies to not only your credit card balance but also any other outstanding accounts you have, like student loans or car payments. Your bank looks at your entire credit report and all your accounts when deciding your limits.
Every time you make an on-time payment, you signal to creditors that you are reliable and trustworthy—which is one of the best ways to avoid a credit limit reduction.
Consistent and predictable credit card usage is another positive signal to creditors. Even if you prefer not to use your credit card often, try to make at least a few purchases each month to maintain some activity on the account. Consider setting up an automatic payment from your credit card and then immediately paying off the balance from your checking account. This ensures your bank will not lower your credit card limit due to inactivity.
It is also a good idea to maintain steady buying behavior. If you have not used the card in months and then suddenly start making frequent large purchases, this could raise a red flag to your bank.
Just like infrequent or no account activity can be a red flag, too much credit utilization can also be a warning sign to banks and credit agencies. Using too much of your available credit can cause your credit to drop, which may cause your bank to reduce your credit limit.
To have a better chance of maintaining good credit, use no more than 30 percent of your credit limit. This means that if your credit limit is $3,000, you should aim for an available credit amount of $2,100. This is because, according to FICO®, “amounts owed” account for almost one-third of your overall credit score. Credit utilization is one of the biggest factors in this “amounts owed” category—so try to keep it below 30 percent to keep your credit in good shape.
Catching errors on your credit report will not only help you maintain good credit, but it will also be a good defense against credit limit reductions.
Once or twice a year, check your credit report for mix-ups or fraudulent activity that could make you look like a bigger risk than you actually are. For example, if a credit bureau mixes your information with that of another borrower who has the same name, or if they mistakenly report a missed payment, you could be penalized unnecessarily. Contact the credit bureau immediately if you notice any issues.
Monitoring your credit report is also a good way to protect your identity. Although uncommon, identity theft may start a ripple effect that causes your credit limit to drop. If someone opens up new lines of credit in your name or makes large purchases on a stolen account, it could damage your credit.
In addition to regularly checking your credit report, consider the following identity theft prevention tips:
No matter how careful you are, sometimes outside circumstances—such as a job loss or unexpected medical bills—can damage your credit. In turn, your bank may reduce your credit limit. If this happens, there are steps you can take to soften both the immediate and long-term damage to your financial health.
The first thing to do if you have received notice of a decreased credit limit is contact your credit card company. Ask why your credit limit was reduced without warning, as this is crucial for deciding your next steps. Do not hesitate to defend yourself and make a case for how you are not a risk. Items to mention could be consistent on-time payments or a recent raise at work.
Once you have received an explanation for the decreased credit limit, you can explore your options to resolve the issue.
After a credit limit reduction, your credit utilization rate may increase. For example, if you have a balance of $1,000 and your limit is suddenly reduced to $2,000, your utilization rate is now 50 percent—which is far more than the recommended maximum of 30 percent. To offset this and keep your credit from dropping, pay off as much of your balance as possible.
To help offset the credit limit decrease on a credit card, consider asking for a credit increase on another account. This may also help improve your credit by increasing the amount you can spend while still staying below 30 percent credit utilization.
When requesting a credit increase, ask if it will result in a hard credit inquiry. It may be best to wait if you have already had a few hard inquiries recently. Too many hard inquiries in a row may cause your credit to take a hit.
Most importantly, don’t bite off more than you can chew when requesting a new credit increase. Review your payment history, ask yourself if you can handle the new limit and make sure to stick to best practices by making consistent on-time payments.
If you can’t get a credit increase, consider opening a new credit card to increase your overall credit limit and offset the reduction. Just like when you’re asking for a credit increase, ensure you can handle payments on an additional line of credit. Consider automating minimum payments if you think you may forget.
Additionally, keep in mind that opening a new line of credit may result in a hard inquiry, which could have a negative effect on your credit. If you have had multiple hard inquiries recently, consider waiting.
Even though you may want to cancel a card after a credit limit reduction, resist the urge. Canceling a credit card reduces your overall credit limit, which may increase your credit utilization. Say you have two credit cards, both with $3,000 limits. Your overall credit limit is $6,000. Canceling one card will slash your overall credit limit in half, increasing your credit utilization rate, and potentially hurting your credit.
Another reason not to cancel your card is that creditors like to see a long credit history with multiple accounts. Canceling a card decreases your total number of accounts and cuts down your credit history, which may not be good for your credit.
Avoiding credit limit reduction involves making consistent and timely payments, using credit responsibly and regularly monitoring your credit report for fraud and errors. These proactive steps minimize your risk of facing credit limit reductions and can contribute to healthy credit.
If you have recently experienced a credit limit reduction due to poor credit, it might be time to reevaluate your credit. Learn more about our services and get your free credit report consultation today.
Now that you know how to avoid and deal with a decreased credit limit, you may still have lingering questions. Below, we answer the most common concerns about credit limit reduction.
To avoid credit limit reductions, you should prioritize strong credit health. Make timely payments on all your accounts, use your credit card regularly to maintain account activity and keep credit utilization below 30 percent.
You should also monitor your credit report to prevent potential credit limit reductions caused by identity theft.
Yes. A lowered credit limit can cause your credit utilization ratio to increase, negatively affecting your credit. A lowered credit limit may also prevent you from making larger purchases or managing unexpected expenses.
Yes, credit card companies can lower your credit limit without warning. Several factors can contribute to this, like shifting economic conditions, changes in your creditworthiness, or the card issuer’s internal risk evaluation. Stay informed about any changes in your credit limit by regularly monitoring your credit report and credit card accounts.