Here's why you may want to check your credit limit
And what you can do if it's been slashed
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If you haven’t checked your credit card limit recently, it’s a good idea to take a peek. Millions of Americans said their limits had been slashed in recent months, according to a survey by CompareCards.
In the economic fallout of the pandemic, it’s one way banks are trying to reduce risk, says credit expert John Ulzheimer, formerly of FICO and Equifax. “More people are out of work or working fewer hours, so the reduction in limits is to prevent a consumer from running up a large balance that they cannot pay back,” he says.
A credit line decrease may impact your credit and ability to borrow what you need—but there are ways to lessen the blow. Here’s what you should know.
What is a credit limit?
Your credit limit is the maximum amount your credit card issuer will lend to you. Once you hit that limit, you must pay down your balance before charging more.
According to the Fair Credit Reporting Act, banks only have to notify you of a credit limit decrease if you missed a payment or otherwise raised a red flag. If you haven’t received one of these notices, you can find out if your limit has changed by checking your credit card statement, calling the issuer, or logging in to your account.
Can a lower limit affect your credit score?
In short, yes. “Lower limits can mean a spike in your revolving utilization ratios, which will almost certainly lead to lower scores,” Ulzheimer says.
Here’s how it works. Your credit scores are partially based on your credit utilization ratio, or how much credit you’re using. A low credit utilization ratio signals less risk to a lender—which keeps your credit healthy. Ideally, your credit utilization ratio should remain around 30% or less. Most credit limits were cut by $1,000 or less in the CompareCards survey, though 22% were lowered by at least $5,000.
For example, if the credit limit on your only credit card is $2,000 and your balance is $400, then you’re using 20% of your credit limit. But if your issuer recently dropped your limit to $1,000 and your balance doesn’t change, then you’re automatically using 40% of your credit. As a result, you appear to be a riskier borrower and your credit scores may fall.
What can you do if your credit line was lowered?
If you find yourself in this position, there are a few things you can do to mitigate the effects on your score.
1. Ask the issuer to increase it again
If your credit card limit was cut, reach out to your card issuer. “You can certainly ask the issuer to reconsider their decision,” Ulzheimer says. “But, they can certainly say ‘no.’ ”
Having a good credit score can improve your chances of reinstating your original credit line. You can also point out how you’ve used the card responsibly. Mention how long you’ve been a customer and that you’ve always made on-time payments, for example.
2. Talk with your other card issuers
If that doesn’t work but you have another credit card, contact the other issuer. You can ask them to increase your credit limit.
This move can affect your credit in two ways. The issuer may pull your credit when you request an increase, and a hard pull may ding your credit temporarily. But you’re also increasing your total available credit, which can improve your credit health. Overall, it could have a positive effect.
3. Take out a new credit card
Another option is applying for a new account with a different issuer. This can create the same push-and-pull relationship: The negative effect from the hard inquiry will likely be softened by the overall increase in your available credit.
If you need a few ideas, you can take a look at some of our favorite credit cards that we've reviewed.
But keep in mind: Because banks are looking to reduce risk, they may be offering fewer credit cards right now. Before applying, you can try to improve your chances of qualifying.
4. Pay your bill more frequently
If all else fails, you can start making more frequent payments. Instead of paying once a month, you could pay off the balance every couple weeks, so that your utilization ratio hovers around or below the recommended 30%.
Your credit card terms can change, and you may or may not get a notice about it. From time to time, check the important details of your credit card, including your credit limit, annual percentage rate, and due date.
Also aim to keep your credit utilization around 30% or less. If your credit limit dropped recently, you can contact the issuer, change your spending habits to help keep your credit healthy, or open a new credit card.
Although you don’t want to use too much credit, it’s a good idea to use your credit cards occasionally. In the CompareCards survey, 1 in 4 cardholders said they had at least one credit card closed by their issuer in the past 60 days. Card issuers were more likely to cancel those accounts due to inactivity.
Consider using them for small, recurring payments, like Netflix or your cellphone bill, and set up alerts to make sure you pay the bill when it’s due.