What Happens When Your Credit Limit is Reduced

Stephanie Miller
November 7, 2018
Reduce Credit Limit

If you manage your credit cards responsibly and pay your balances as scheduled, you probably expect your credit limits to go up over time. But did you know that the opposite can actually happen, and your credit limits could be unexpectedly slashed?

It’s true. On occasion, and often without warning, credit card issuers will actually reduce your credit limit. This can happen even if you’ve been a great customer! And while this undesired change might irritate you, the impacts could be far greater: it could actually drop your credit score, too.

Here’s a look at why your credit card issuers might lower your credit limit, the effects it could have, and what you can do about it.

Why Issuers Reduce Credit Limits

It’s easy to understand why banks and lenders are a bit cautious these days. After all, they were left holding the bag when the recession hit and borrowers defaulted on their balances left and right. Just because we have recovered from 2007-08’s recession, though, doesn’t mean that this air of caution has dissipated; in fact, many believe that we are on the cusp of yet another economic pothole.

Whether your credit card issuer is simply more judicious now than they were a decade ago or if they’re concerned about another impending recession, the result can be tighter limits on cardholders.

You could be the perfect credit card customer, paying your bill on time every month and keeping your balance low. Unfortunately, though, this might make you even more susceptible to a lowered limit. If you aren’t using the line of credit that you’ve been extended, the bank can view that as an unnecessary liability, and simply trim your limit.

Now, a bank cannot lower your limit to an amount that’s below the balance you currently hold, and then charge you an over-limit fee. But what they can do is something called “chasing the balance.”

Chasing the balance is a practice where the issuer cuts your credit limit as you pay down a debt balance over time. The lower your balance gets, the lower your limit also seems to get. And it’s detrimental to your credit score.

How Credit Limit Reductions Impact You

The most frustrating impact that a sudden decrease in your credit card’s line of credit can have is in regards to your utilization.

Let’s say that you have a $10,000 limit on a credit card and carry around an $8,000 balance; in this case, you have an 80% credit utilization, which is high. Over time, you work hard to chip away at that balance, bringing it all the way down to $4,000. While this should result in a new utilization of 40% (which is much better for your credit score!), you suddenly learn that the issuer has also reduced your credit limit to $5,000. With your $4,000 balance, you are back up to an 80% utilization, and your credit score will reflect that.

Issuers have every right to “chase the balance,” but it’s your credit score that will take the hit.

Another potential downside to a limit reduction is simply the loss of available credit. Even if you don’t carry balances on your cards, it’s nice to know that the credit is available to you were something to happen. But if you suddenly find that your credit limits have dropped, you’ll need to have an alternate safety net in place.

What You Can Do About It

Have you suddenly been notified that your credit limit has dropped? Well, there are a few things you can do.

The first option you have is to immediately call the card issuer. Request an explanation for the drop, as well as to have your original limit restored. Depending on the company, they may review your account or even run a soft pull of your credit.

This might get your original limit restored. It might also get you nowhere. Be prepared to hear “No” in some instances.

If you do get denied in your request, there are other ways to mitigate the impacts. You can open a new credit card account to help add to your available credit and reduce your utilization. Just be aware that a new account will impact your credit score in other ways.

You can also transfer some of your balance to a 0% APR card, if the new, lowered limit puts your account in a high utilization bracket.

Moving forward, keeping your card account active by making purchases every couple of months can help mitigate the risk of a limit reduction. There’s no easier way to get an automatically reduced line of credit – or even a closed account! -- than to let a card sit completely dormant.

Lastly, if a card issuer decides to slash your credit limit, don’t take it personally. The company could have any number of reasons for tightening the reins on available credit, and sometimes there’s nothing you can do about it.

This is just another great reason to avoid carrying around credit card debt, though, and another argument for holding multiple card products that meet your needs.

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