Having your credit limit reduced is common and can even happen if you’ve been good with credit and made all your payments on time. When a creditor lowers your credit limit, it can negatively impact your credit score. However, you need to know that there are things you can do – by yourself and with the help of a credit repair company – when this happens to minimize the damage to your credit and to fix the problem
Why Would a Credit Limit be Reduced?
So, you received a message from your credit card company notifying you that your credit limit has been lowered. It happens all the time, and while it’s frustrating because it limits your purchasing power and harms your credit score, you don’t have to sit around and accept it.
Why Would a Bank Lower Your Credit Limit Anyway?
During times of financial crisis or recession, banks may evaluate outstanding risk, which is often unused credit. To minimize the risk to banks in uncertain economic times, the bank may choose to slash your credit limit in the event you decide to use your card more and wind up not being able to pay because of financial circumstances.
It’s important to remember that credit limits aren’t a right, nor are they guaranteed; a bank can reduce your credit limit at any time, and they don’t need to give you a reason. You did read the fine print when you signed up for your card, didn’t you?
Also keep in mind that the reduction of credit limits is usually made by an algorithm rather than a human being sitting down and assessing your financial health, payment history, and credit.
Another reason a bank or credit card company might lower your limit is because of ‘low usage.’ If you have a limit of $20,000 and you’re not using a fraction of that, the bank may alter your limit to reflect your usage pattern.
Does it Matter if Your Limit Is Lowered?
In a word: Yes. When a bank lowers your credit limit, it immediately affects your buying power and the amount you’re allowed to borrow. Also, a reduced credit limit can affect your credit score by increasing your overall credit utilization. For example, let’s say you had a limit of $20,000 and only had a balance of $5,000. You’re only using a quarter of your credit, which looks good on your credit report. However, if the bank suddenly slashes your credit limit to $10,000, now you’re at the half, which looks terrible and reflects poorly on your credit score. Credit utilization accounts for 30 percent of your credit score, so it’s easy to see how a lowered credit limit can reduce your score.
Now, it’s important to remember that while a bank can reduce your credit limit for any reason, what they can’t do is cut it and then hit you with an over-the-limit fee if you’re currently above your new limit. The bank is required by law to give you at least 45 days from the time they notify you about your lowered threshold before assessing any fees.
What to do if Your Limit is Lowered
Most people assume there’s nothing they can do when they get notified that their credit limit has been lowered, but that’s not the case. The first thing you can do is to contact your creditor and ask to speak to a representative. Remember, most times the limit was lowered by a computer algorithm rather than a person, so talking to a live rep is an excellent way to get answers as to why this happened, whether it was an error, and if your old limit can be restored. Remember to be polite when you call, and it never hurts to mention how long you’ve been a customer and never missed a payment if that’s the case.
If you’re new lowered limit has put your credit utilization in a bind, consider transferring the balance to a card with a higher limit. If you’ve been in the market for a new card, now is the time to go on the hunt to find one with zero percent interest for balance transfers. Just keep in mind that opening new lines of credit can cause your credit score to take a hit too.
What you don’t want to do is to close out your old card to spite the bank because if you have a long credit history there, that’s going to reflect negatively on your credit score if you wipe out years of on-time payments. Also, closing out that account lowers the available credit you have to work with, so transfer the balance, and suck it up. If you maintain good relations with that bank and continue to make on-time payments, there’s a good chance you can get your limit raised in the future if needed.
It’s also essential you monitor your credit reports when a limit gets lowered to see what kind of a hit you take. If your score does drop, you can take the necessary steps to build your credit score back up such as using your card for small purchases like Netflix or coffee and paying it off every month to keep the account active and in good standing.
Finally, paying off your balance quickly on the card that got hit with the lower limit goes a long way to bringing down your credit utilization and pointing your credit score in the right direction.
Having your credit limit lowered isn’t a reflection on you or your credit, so don’t it personally. These things happen to everyone; you have to be smart about how to handle it and roll with it until you can get yourself straightened around.
Make your payments on time and pay down your balances to ensure your credit score moves up. And keep in good standing with your bank that lowered your rating in the hopes it can be restored in the future.