Card Issuers Could Start Lowering Credit Limits. Here’s Why

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When there’s economic turmoil, credit card companies tighten their purse strings. 

Every credit card has a credit limit, which is the maximum amount you can spend on it. You may already know that if you want more spending power, you can request a credit limit increase. But not everyone realizes that card issuers also can and do lower credit limits.

Recently, some consumers have reported getting notices about their credit limits being reviewed and potentially decreased. If you received a letter like this, or if you logged in and noticed your credit limit was suddenly lower, you’re probably wondering what’s going on. Here’s why this happens and how it could affect you financially.

Why card issuers lower credit limits

There are a few reasons why a card issuer would start cutting credit limits. One is economic uncertainty, which is applicable right now. Inflation has been high and many experts are expecting a recession. Because this increases the chances that people won’t be able to pay their credit card bills, card issuers lower credit limits to reduce their exposure. They did the same in the early days of the COVID-19 pandemic.

Here are the other typical reasons why a credit card company would cut your credit limit:

You appear to be in financial trouble. If you’re missing payments or your credit score drops, your card issuer could see you as a higher risk and reconsider the amount of credit it’s extending to you.You don’t use much of your credit limit. Card issuers can only extend so much credit to consumers. If you don’t use much of your credit, the card issuer may decide it’s better off reallocating some of that credit to a new client.

Credit card companies can lower your credit limit without notice, unless it’s due to adverse information on your credit history. For example, if you miss a payment and your card issuer decides to cut your credit limit for that, it would need to notify you. On the other hand, if your card issuer cuts your credit because of a down economy, it doesn’t need to notify you.

How a lower credit limit affects you

A lower credit limit means you can’t spend as much on your credit card, but this may not actually have much of an impact on you. When card issuers cut credit limits due to the economy, they generally still try to leave you plenty of spending power.

Let’s say you have a $20,000 credit limit, but you never have a balance of more than $2,000. Your card issuer probably wouldn’t cut your credit limit to $3,000. It’d be more likely to reduce your limit to $10,000 or $15,000, so you still have more than enough to cover what you normally spend.

The bigger issue is that a lower credit limit can negatively affect your credit score. That’s because one factor in your credit score is the ratio between your card balances and your credit limits. This is called your credit utilization ratio. A lower utilization ratio is better, and a popular rule of thumb is to keep yours below 30%.

If your credit limit gets cut, your credit utilization will increase. Imagine you have a card with a $5,000 balance and a $20,000 credit limit. Your credit utilization would be 25%, which is a good number for your credit. Then, your card issuer decides to cut your credit limit to $10,000, pushing your utilization to 50%. That would lower your credit score.

Your credit utilization will stay low if you always pay your credit cards in full, which is a smart financial habit. But if you’re carrying balances on your credit cards, then lower credit limits could have an impact.

What to do if your card issuer cuts your credit limit

If your card issuer notifies you about plans to review or decrease your credit limit, first see if there’s a way to opt out. Some card issuers include a phone number you can call to opt out and keep your credit limit. Read the notice thoroughly to check if you have this option.

If you can’t opt out, or if your card issuer reduced your credit limit without notice, contact customer service. You can find the number on the back of your credit card. Let them know that having enough credit for your financial needs is important to you, and ask them to restore your previous credit limit.

This may or may not work. As mentioned above, credit limits are issued at the discretion of the card issuer and can be changed at any time. What you can do regardless is use your card regularly, pay the bill on time, and request a credit limit increase a few months down the road.

Another option, if you want to have more available credit, is to open a new credit card. For a better chance of a high limit, check out high limit credit cards. Although your credit limit depends in large part on your credit history and income, high limit cards are known for above-average limits.

Although it may seem alarming to have your credit limit reduced, this is a normal occurrence during a down economy. Get in touch with the card issuer to try and avoid it if you can. But if not, just keep your new credit limit in mind so that your credit utilization doesn’t get too high.

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