Few things are as frustrating as seeing your credit limit reduced without warning. You might feel blindsided—especially if you’ve been managing your money responsibly. A sudden cut in your credit limit has the potential to mess with your financial plans, affecting your buying power and possibly even your credit score.
You might also be wondering, can credit card companies reduce your limits? Is it even legal, and why does this happen? Perhaps more importantly, what can you do if it happens to you? Keep reading to find these answers.
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Can a credit card company lower your limit without telling you?
Yes, credit card companies have the legal right to reduce your credit limit without prior notice. This might seem unfair, but it’s a common practice in the credit industry.
Credit card issuers regularly review the credit profiles of their customers and can adjust credit limits based on various factors.
“They do not have any legal obligation to inform borrowers about these changes ahead of time,” says Lyle Solomon, advisor and principal attorney at Oak View Law Group. “However, they do inform you about the credit limit reduction after the fact. You may find information about the lender’s policies in the terms and conditions of your agreement.”
Maybe you’ve found yourself thinking, “But I have a paid-off credit card and they lowered my limit!” Sadly, these changes can occur even if you’ve been a responsible cardholder, making timely payments, and maintaining a good credit score.
Credit limit decrease: reasons and possible situations
There are some common circumstances where an institution could reduce credit limits:
- High credit utilization: The credit utilization ratio is the percentage of your available credit that you’re using at any given time. For example, if you had a $10,000 limit and carried a $3,000 balance, your utilization ratio would be 30%. If your credit card balances are consistently high compared to your credit limit, your credit issuer might view this as a risk and decide to lower your limit. “Thirty percent of credit score weightage on utilization might be the reason they chopped your limit,” says Oliver Brifman, senior financial services consultant at eMerchant Authority. A lower utilization ratio (below 10%) is better for your credit score.
- Late payments or missed payments: Payment history is a significant factor in your credit profile. If you’ve recently missed a payment or paid late, your credit card company may reduce your limit as a precautionary measure.
- Change in credit score: A drop in your credit score, even if it’s minor, can trigger a limit reduction. Credit card companies monitor your credit regularly, and any dip in your score might lead them to reassess your creditworthiness.
- Economic factors: Sometimes, broader economic conditions, such as a recession or financial crisis, prompt credit card companies to lower limits across the board to mitigate risk.
- Inactivity: If you haven’t used your credit card in a while, your issuer might reduce your limit. Credit card companies want to ensure that credit lines are actively managed, and inactivity can suggest a lack of need or interest.
Credit limit decrease strategy: Here's what to do
“Brace for impact—a limit drop today could lead to a credit score rollercoaster that lasts up to 24 months,” Brifman says. But this doesn’t have to spell disaster. By taking the right steps, you can mitigate the impact and possibly restore your limit over time.
1. Contact your credit card issuer
Ask your credit card issuer why your limit was reduced and if there’s anything you can do to have it reinstated. Sometimes, a simple explanation or demonstration of improved financial habits can prompt them to restore your previous limit.
Be prepared to provide any necessary documentation, such as proof of income or updated credit reports.
2. Pay down your balances
If your credit limit was reduced due to high credit utilization, focus on paying down your balances. Lowering your overall debt can improve your credit score and reduce your credit utilization ratio, which may lead to your limit being restored.
Additionally, reducing your debt will free up more of your available credit, giving you more breathing room and possibly preventing future limit reductions.
3. Monitor your credit regularly
By checking your credit score and report frequently, you can spot any negative changes early and take action before they result in a limit reduction. Use free credit monitoring services or consider subscribing to a service that provides more detailed insights into your credit profile.
“Also, try to avoid taking up more debt through future big expenses until your current credit situation improves,” Solomon says. “If you fail to make those payments, it might strain your limit further.”
This might help: How to Become Debt-Free: 7 Steps to Get There
Does reducing your credit limit hurt your score?
Yes, a credit limit decrease can affect your credit score, particularly if it causes your credit utilization ratio to spike.
The most effective way to mitigate the impact of a reduced credit limit on your credit score is to pay down your balances as soon as possible. Reducing your debt will lower your credit utilization ratio and protect your credit score from taking a hit.
Also, if you have other credit cards, consider requesting a limit increase on those cards to offset the reduction. This can help maintain your overall credit utilization ratio, which is a crucial factor in your credit score.
While it’s not always advisable to open new credit accounts frequently, doing so can increase your overall available credit, thereby reducing your utilization ratio. Just be mindful of the potential impact on your credit score due to a hard inquiry and the potential to incur additional debt.
Final tips for preventing future credit limit reductions
Now you know the answer to “Why did my credit limit suddenly decrease?” here's how to avoid this issue in the future: keep a healthy credit utilization ratio, make timely payments, and actively manage your credit accounts.
If your limit does get reduced, remember you have options to soften the impact on your credit score and financial health.
“In the wild world of finance, it's not just about the rules and numbers,” Brifman says. ”It's about decoding the cryptic moves of credit cards and staying ahead of the curve.”