- There are many reasons a credit card issuer could decide to reduce your credit limit.
- You should avoid reaching your spending limit; ideally, keep your utilization ratio under 30%.
- The higher your credit limits, the better your credit utilization ratio.
You're cruising along with your favorite credit card when you get a surprise notification that your credit limit has decreased. There could be a number of reasons for sudden credit limit decreases, and most of them are within your control.
Here's how to handle a credit limit decrease, along with tips to negotiate a higher credit limit.
What is a credit limit decrease?
A credit limit decrease is exactly as it sounds — it's when your credit card issuer reduces the maximum amount you can charge to your card.
For example, you may have a credit limit of $5,000 on your credit card, which means you can have a balance of up to $5,000 on the account. But if, after reviewing your account, your card issuer decides you're suddenly more of a lending risk, it may decide to lower your limit to $3,000.
Why was my credit limit lowered without notice?
Just as creditors can reward you for your loyalty and excellent payment history with a random, fat credit line increase, they can also penalize you by lowering your spending limit. The reasons can vary, but most relate to the creditor suddenly viewing you as an increased credit risk — or a high risk of defaulting on the card. For example:
- Your spending habits changed. If you haven't used your credit card in a while and then suddenly start charging a lot, or you've always paid the balance in full and now you're carrying a balance, the unusual activity may be a signal that results in a lower credit line.
- Your credit score dropped. If you've had a decline in your credit score for whatever reason — increased 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 may lower your limit.
- Your identity was stolen. If someone opened other cards in your name or is on a spending spree under your stolen identity, you look like a risky borrower.
- Your credit report contains errors. An error like a missed payment or a collections debt on your credit report could result in 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 lenders 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 a 30% utilization ratio for that card. As a rule of thumb, creditors prefer you to keep your balance below 30% of the credit limit for each credit card balance you maintain. Likewise, your credit score may take a hit if you have balances above 30% of your available credit. If your card went over that 30% utilization, the change may trigger a lower limit.
Banks may even collectively lower the credit limits of groups of cardholders to reduce their risk of exposure during an economic downturn or uncertainty, though this is rare.
How often credit limits are reviewed
Credit card issuers don't necessarily stick to a firm timeline when reviewing customer credit limits. Typically, issuers will conduct periodic reviews (every six or 12 months, for instance). But if your borrowing behavior has changed or the issuer notices other red flags, your credit limit may be reviewed a lot sooner.
How a reduced credit limit affects your finances
Having your credit limit reduced doesn't just decrease your borrowing power. It can have other undesirable effects that can impact your overall financial well-being.
Impact on credit utilization ratio
Your credit utilization ratio is the percentage of your available credit you're using; that is, how much you've borrowed compared to the maximum you're allowed to borrow. Generally, the lower your credit utilization ratio, the better a credit risk you look to lenders. A good rule of thumb is to keep your credit utilization ratio lower than 30%.
A credit limit reduction can increase your utilization ratio. Suppose you owe $2,000 on a card with a $10,000 credit limit. In that case, your credit utilization ratio is 20% ($2,000 / $10,000). But if the card issuer lowers your credit limit to $5,000, your credit utilization ratio jumps to 40% ($2,000 / $5,000).
Effect on credit score and borrowing power
Can a lower credit limit hurt my credit score? Yes, because a higher credit utilization ratio can cause your credit score to drop. Credit utilization is one of the major factors in calculating your credit scores; for example, under the FICO scoring model, your amounts owed account for 30% of your score.
A lower credit score affects your ability to qualify for other credit and can result in less attractive borrowing terms, such as higher interest rates.
Steps to manage or reverse a credit limit decrease
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 credit report semi-annually to help uncover any errors and report them right away.
Moreover, certain provisions protect you from over-the-limit fees if your card becomes maxed out within 45 days of the lowered limit.
How to request a credit limit reinstatement
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.
Suppose your credit limit was reduced because your spending habits changed or you haven't been using your card. In that case, 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.
If your limit was lowered 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 negotiate 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.
Finally, if the reason turns out to be an error or identity theft, 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 flag the error to 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.
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.
Strategies for improving creditworthiness
Building your credit score is a good strategy for improving your creditworthiness in the eyes of lenders. However, credit card companies look at factors beyond your credit score and history when setting your credit limit (or deciding to change it).
One simple step you can take is keeping your income updated with your credit card issuers. You can usually do this through your online account. If your income has increased, you're more likely to receive a higher credit limit or prevent a reduction.
Preventing a credit limit decrease in the future
Maintaining a strong payment history
The best way to prevent a lowered limit is to pay your credit card bill on time each month. Your payment history has the biggest effect on your credit scores (worth 35% of your FICO score, for example), so even one late payment can have an impact.
It's best to pay off your balance in full each month to keep a low credit utilization ratio. But if you can't pay in full, try to make more than the minimum payment to save on interest charges and stay below your 30% utilization rate.
Tips for keeping credit card accounts in good standing
If keeping track of your credit card balances and payment due dates seems daunting, consider using a spreadsheet or budgeting app to keep yourself on track. You can also set alerts on your credit card accounts for things like approaching payment due dates or balances exceeding a certain threshold.
Finally, don't forget to use your credit cards, even occasionally. Credit card inactivity can signal to a lender that you don't need the entire credit line they've given you. Prolonged inactivity may even prompt a lender to close your account entirely.
FAQs about credit limit decreases
Why did my credit line decrease?
Your issuer may have lowered your credit limit for any of several reasons, including unusual spending behavior, increased overall debt, late payments, or inactivity on the account. Issuers might also adjust credit lines based on their internal policies or economic conditions.
Can I request an increase after a credit limit decrease?
Yes, you can contact your credit card issuer to dispute the decrease, especially if your financial situation or credit score has improved. Be prepared to provide supporting documentation.
Will a reduced credit limit affect my ability to get new credit?
A reduced credit limit can increase your credit utilization ratio, potentially lowering your credit score. It's important to adjust your spending or pay down balances to mitigate this impact.
What steps can I take to prevent future credit line decreases?
Keep your credit utilization low, make payments on time, regularly use your credit card, and maintain a stable income. Also, periodically review your credit report for accuracy.
How long does it take to get a credit line reinstated or increased after a decrease?
The timeline can vary widely among issuers and depends on factors like your credit improvement efforts and the issuer's policies. Some cardholders see changes in a few months, while others may wait longer.