What You Need to Know About Credit Line Decreases
Have you ever received a notice from your credit card company informing you that your credit limit has been cut? It happens more often than you’d think. For some people, this is a minor inconvenience. For others, it makes a tough financial situation even more difficult. Either way, it’s important to know that this can happen to you and also be aware of strategies to avoid it and ways to address it if it does happen.
Here’s what you need to know:
Creditors can change your credit limit at any time
If you’ve never experienced an unexpected credit limit decrease, you may be thinking, “Is that even legal?” Yes, it is. In most cases, the creditor should notify you of the credit limit decrease and provide information about the reasons for the change.
Very high or very low credit usage is more likely to lead to a credit limit decrease
Creditors lower credit limits to decrease their exposure to risk. If you are using a high amount of your credit limit and they see other changes to your credit profile that makes them think you could default on your debt, they may reduce your credit limit to avoid any potential further damage to their bottom line.
On the other hand, not using a particular credit line can also prompt a credit card company to decrease your limit. Credit card companies only have a limited amount of credit they can extend, so if you are not using that available credit, they may cut yours in order to issue more credit to another customer.
Credit limit decreases are more common during a rocky economy
Uncertainty in the economy prompts credit card companies to worry more about their bottom line. They know that when people lose their jobs, they may rack up debt that they won’t be able to pay off quickly. This is a good reminder that you may not be able to rely on your credit as much as you thought during a financial crisis, so building up an emergency fund in a high yield savings account should be a priority.
A credit limit decrease will likely have a negative impact on your credit score
Credit utilization (the amount of credit you’re using compared to your credit limit) is a major factor in your credit score. This means that a reduction in your available credit will likely cause a drop in your score. A study from the CFPB found that consumers with lower credit scores who saw their credit limits cut ended up using 94 percent of their available credit. Even consumers with the highest credit scores saw their credit utilization more than double from 37% to 78%.
There are steps you can take if your credit limit was reduced
First, find out the reason for the reduction in credit. If the creditor did not outline the cause already, call and ask about it. This information can help you figure out your next steps.
If you have another credit card that you use and are in good standing with, ask the creditor for a credit limit increase. Some credit card companies will evaluate a credit limit increase with just a “soft pull” of your credit, which won’t affect your credit score, but make sure to ask first. If you don’t have any other lines of credit, you can increase your credit limit by applying for a new credit card, but this generally does require a “hard pull” of your credit, which can ding your credit score, especially if you don’t get approved for the card.
Both of these strategies are best for people who haven’t had any recent delinquencies and have good credit scores. If you were already approaching your credit limit before the reduction or have other recent negative marks on your credit report, the most effective strategy is to focus on starting to pay down your balance. Once your credit utilization is around 35% or less, you can then try one of the strategies above.
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