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Due to the pandemic, shut-downs have created an economic crisis that substantially increases the risk for lenders.
With tens of millions of people unemployed, it’s not surprising there’s a greater reliance on credit. And with that, a higher percentage of missed payments on these accounts.
To minimize risk, financial institutions are reducing some borrowers’ credit limits and lines of credit.
They’ve also tightened approvals for new credit, removed some loan and credit card options from their websites, and even canceled consumers’ credit cards.
While many cuts are in response to financial challenges from COVID-19, banks do make adjustments to credit limits for various reasons.
Some changes benefit consumers, but others can negatively impact their financial health.
Read on to learn:
- reasons why banks reduce credit limits
- how lower limits can impact your finances
- what to do if credit card companies reduce your spending limit
- how to help prevent it from happening in the future
What’s a Credit Limit & How You’ll Know It’s Reduced
When you apply for and meet a lender’s qualifications for revolving credit (a credit card or line of credit), they’ll offer you a set spending limit – the maximum amount the financial institution allows you to spend or borrow.
Your credit limit is based on your application’s information, including your household income and other debt, credit score, and credit history.
The credit limits you have on various products impact your overall credit score and ability to access future credit – including car loans at reasonable rates or mortgage approvals.
How will you know your limits slashed?
If you access your card accounts online or through an app, you might see the overall amount you can spend has decreased. Your creditor may also send you a letter or email informing you of credit limit reductions.
Reviewing a free copy of your credit report will reveal you have less credit available. And free services such as Credit Karma may also notify you of your score dipping because of a recent change to your spending limits.
Do You Have Any Rights?
Watching your credit score drop and having access to a smaller line of credit is frustrating.
But you may not realize that credit card issuers and other financial services companies regularly adjust consumer credit limits.
Most banks and credit unions reserve the right to alter spending limits.
They may increase your credit line if you have good credit habits, including making timely payments and utilizing only a small portion of your available credit.
Your credit line can also see a reduction or cancellation at the lender’s discretion and without warning, as long as it doesn’t violate federal regulations of your cardholder agreement.
Luckily, the Credit CARD Act of 2009 limits the fees and finance charges you’ll have to pay for a period of time if your current spending exceeds your new limit.
“If a card issuer decreases your credit limit, the card issuer cannot charge you over-the-limit fees or a penalty rate for exceeding your new, lower credit limit, until 45 days after it has given you notice of the decreased credit limit. A card issuer cannot charge you over-the-limit fees if it didn’t give you notice of the decreased credit limit or if you haven’t opted into the payment of over-the-limit transactions.“
Reasons For Credit Limit Decreases
Your creditworthiness helps a lender determine your initial credit limit. But there are plenty of reasons why they may decide to reduce your credit limit.
Financial institutions view any combination of these red flags as a signal to reconsider how much money to lend you.
1. Changes in your spending habits. According to Experian, your spending patterns are closely tracked by credit card issuers. The data lenders gather may cause them to adjust your credit limit, even if you pay off your bill in full each month.
2. Late or missed monthly payments. It’s probably no surprise, but your issuer may reduce their risk by lowering your credit limit when you make late payments. Or when you don’t pay at least the minimum balance due.
3. Not paying off your credit balance in full each month. When you can’t pay what you owe at the end of your billing cycle, you’ll pay interest on the balance remaining. Your credit score may also suffer if your credit utilization is more than 30% of your limit.
4. You aren’t using your credit cards or line of credit. Unused Credit can trigger a decrease in your spending limit – even if you have good credit. Rather than allowing you to leave a significant portion of your credit limit unused, the credit card issuer will lower your threshold to mitigate their risk exposure.
5. Someone you share credit with has lousy credit. If you’re the cosigner on a loan or have joint credit cards with someone with poor payment history, their bad credit may also result in the lowering of your credit limits and score.
6. Credit reporting errors. There’s always a chance a mistake in your credit history could cause a lender to pull back on how much they’ll allow you to spend. Make sure you take advantage of reviewing your credit report for free.
7. Your identity was stolen. Reviewing your credit report may also help you determine if someone has fraudulently opened new credit cards or credit lines in your name. 2019 saw more than 3.2 million identity theft and fraud reports. So it’s wise to monitor your credit history carefully.
8. A financial crisis such as a recession or pandemic. A recent survey by CompareCards reports that during the 60 days from mid-May to mid-July 2020, about 70 million cardholders were affected by a reduced credit limit or a closed card.
A number of these red flags are aligned with drops in your credit score too. So, you won’t only have a lower credit limit.
You may also have less chance of getting the job or apartment you want. Or pay higher interest and insurance rates due to a bad credit score.
How Lower Credit Limits Impact You
There are plenty of consequences of having a reduced spending limit.
First, if you face financial challenges, you’ll now have less available credit to cover significant expenses or emergencies.
Making the mistake of exceeding your new limit can also cost you plenty. You may be charged fees or face interest rate increases if you overspend.
When you’re already carrying a high card balance or maxed out your Home Equity Line of credit, you won’t be able to use your card or credit line until you pay it down below your new limit.
Using a card with lower limits will likely put you in the position of utilizing more available credit. When your credit utilization ratio is higher than 30%, your credit score will probably drop too.
What To Do If Your Card Issuer Reduces Your Limit
When you know your limit has been cut and understand how that can damage your financial health, you need to take action to address it.
Contact Your Lender
The first thing you should do is look on the back of your card for the issuer and phone number. Contact the financial institution and ask for an explanation of why they reduced your limit.
The next steps will likely depend on the reason your limit was cut.
When you haven’t been using a card or if you recently went on a spending spree, explain your situation and ask them to restore your limit.
If the representative tells you they can’t give you a credit increase, politely ask to speak to a supervisor and make the request again.
While it may not work, you won’t know until you try. The card issuer may also share what steps you can take to increase your credit limit again.
Look at Other Credit Source
You can also consider opening up another credit card to increase your overall available credit. But keep in mind that lenders have tightened requirements to qualify for some new cards too.
Your credit score may temporarily dip because of any new “hard pull” completed to review your creditworthiness for a new application.
Resist the temptation to close accounts when you’re upset with your lender. The more accounts you close, the less available credit you’ll have, and the higher your utilization of remaining credit will be.
When you have positive credit habits and multiple credit cards or credit lines, you may ask for a credit limit increase on a different card. This can make up for any reduction of available credit where your limit was cut.
Minimize the Risk You’ll See Credit Reductions in the Future
When your credit’s been limited, you can take some critical steps to help prevent it from occurring in the future.
If you have more than one credit card, make a plan to responsibly use them all at least every few months. Lenders target inactive accounts for closure.
Pay your credit card debt balances on time and strive to pay them in full each month.
Also, be mindful of how much available credit you’re using. Staying under the 30% credit utilization ratio will help keep you off the bank’s radar.
Responsible use of credit, taking steps to maintain a high credit score, and reviewing your credit report are proactive moves to keep or increase spending limits.
The Bottom Line on Credit Limit Decreases
If you haven’t yet had a reduction in your spending limit, don’t be surprised if one happens in the future.
While you can do everything possible to prevent a cut, your lender can still make adjustments.
Don’t just assume you can’t reverse a reduction if it happens. Or that you won’t get approval for a new credit card if you apply to boost your available credit.
The better your credit history, the more likely banks and creditors are to address your concerns or want you as a customer.
When a slashed credit line impacts your credit score, remember that it may take time to rebound. But as a responsible borrower with good credit habits, you should eventually see a boost to your score again.
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Vicki and Amy are authors of Estate Planning 101, From Avoiding Probate and Assessing Assets to Establishing Directives and Understanding Taxes, Your Essential Primer to Estate Planning, from Adams Media.