What to Do if Your Credit Limit Gets Cut

If you just received notice that your credit limit has been slashed on one of your credit cards, don’t panic. You’re not alone. And it’s not something you should take personally — even rockstar, top-tier borrowers have seen their limits lowered in recent years.

It’s frustrating, especially if you rely on your credit card for regular purchases or in emergency situations. Fortunately, you don’t have to take the limit reduction lying down. There are steps you can take in order to maximize the chance of restoring your limit.

First we’ll briefly discuss why your credit limit may have been cut, and then we’ll discuss what to do if and when it ends up happening to you.

Why banks might cut your credit limit

We all know banks took a hit during the recession. One of the ways they’ve reacted is to tighten up outstanding risk. For banks, that risk includes unused credit (a.k.a. the gap between the balance on your credit card and the balance you COULD have on your credit card).

In order to limit risk, banks have been slashing credit limits since the recession hit. It’s kind of counterintuitive when you think about it. Wouldn’t you think that, especially in a down economy, banks would want more of your business? They do want your business, of course, but the higher your credit balance, the more of a hit they take if you default. The recession saw unprecedented numbers of people defaulting on their credit cards, with banks left holding the tab.

Plus, if a bank has promised you a $50,000 line of credit, they always need to have that $50,000 available to you. It’s a lot easier to only make $10,000 available to you.

Keep in mind credit limits are not an unalienable right. If you read all that fine print when you applied for a card, you’d see that the credit card company reserves the right to reduce your credit limit at any time, generally for any reason.

There’s often an automated algorithm that analyzes your spending habits. If you do anything out of the ordinary (say, start spending a lot more or less than usual, or at different types of stores), it can throw up red flags that automatically reduce your credit limit.

But I have great credit!

It used to be assumed that good credit scores and stellar borrowing habits immunized borrowers from reduced credit limits, but the recession rewrote the rulebook. In fact, those good habits, including diligently paying down your balance, can actually cause a reduction in your credit limit. It’s called “chasing the balance” and it happens when banks watch you pay down your balance and then lower your credit limit accordingly in order to limit their risk in case of default.

Now, does that mean you should always keep a high balance? Of course not, because that opens up a whole other can of worms that affects your bottom line and credit score. Speaking of credit scores…

The credit score factor

Your credit score is also a factor. Here’s a crazy catch-22 for you: if your credit score lowers for any reason (too many inquiries into the score, or perhaps you defaulted on a different loan), it may signal your bank to lower your credit limit. But lowering your credit limit changes the utilization ratio (again, that’s the amount of credit available compared to the amount of credit currently being used), and that can lower your credit score.

What a lower limit means for you

The consequences of a lower limit? First, there’s the obvious: that you’ll have less coverage available if you need to spend a lot of money in a month.

Unfortunately, your bank can set your limit anywhere. They can set it close to your balance amount, or even below!

Since the amount of available credit you have available is closely tied to your credit score, suddenly having a “maxed out” card can definitely hurt your score, even though you weren’t the one to push the limit.

What can you do if your limit is cut?

It’s time for action. Many people don’t even realize they have options after their credit limit has been cut. Be a savvy consumer and consider the following steps:

  • Pick up the phone. There should be a phone number on the back of your credit. Call it. Ask the customer service representative to restore your old limit. It’s that simple. Don’t forget:
    • Be polite
    • Mention how long you’ve been a customer
    • If you’ve been a responsible, diligent borrower, politely remind them of this fact
    • Ask for the rationalization behind the limit drop and request that your credit card company restore your old limit
  • Transfer your balance to a new card. If you already have another credit card, you can always shuffle things around to stay well below your total credit limits. If you’d been relying on one, shop around and seek out a card with a better credit limit. Just make sure to:
    • Read the fine print and ensure that it’s a good fit for you and your lifestyle
    • Be aware that opening new accounts can ding your credit score
    • Check balance transfer fees. Pay attention to introductory rates and expiration dates
    • Know that this new card can also drop your credit limit at any time.
  • Don’t close the old credit card out of spite. It may be tempting to “show ‘em” by canceling your card, but there’s no need. You can place your balance elsewhere, but keep in mind that canceling your card will only further lower your available credit — thereby impacting your utilization ratio — and can ultimately hurt your credit score.

Fair Warning

The bad news: none of these strategies are foolproof. Sometimes there is simply nothing you can do to restore your credit limit. If you are unable to convince your bank or credit card company to restore your credit limit and you are unable to secure a new card, you will simply need to improve your credit score over time.

The more you educate yourself, the better off you’ll be. Keep reading The Simple Dollar and all the fine print on those cards!

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