Can Your Credit Limits Be Reduced?

 

It's typical to have your credit limit cut, even if you've been excellent with credit and completed all of your payments on time. Your credit score may suffer if your credit limit is reduced by a creditor. However, you should be aware that there are things you can do – both on your own and with the assistance of a credit repair firm – to minimize the harm to your credit and to correct the problem if this occurs.

WHY WOULD YOU REDUCE YOUR CREDIT LIMIT?

So, your credit card provider sent you a notice informing you that your credit limit has been reduced. It happens all the time, and while it's inconvenient since it restricts your spending power and damages your credit score, you don't have to accept it.

WHY WOULD A BANK REDUCE YOUR CREDIT LIMIT IN THE FIRST PLACE?

Banks may analyze outstanding risk, which is typically unused credit, during times of financial crisis or recession. In order to reduce the risk to banks in uncertain economic times, the bank may reduce your credit limit if you opt to use your card more frequently and end up unable to pay due to financial difficulties.

It's crucial to realize that credit limits aren't a right, and they're not guaranteed; your credit limit can be reduced at any time, and you don't have to offer a reason. Did you read the fine print when you applied for your credit card?

Also keep in mind that credit limit reductions are typically done by an algorithm rather than a human examining your financial health, payment history, and credit.

Another reason a bank or credit card firm might reduce your limit is 'low utilization.' If you have a $20,000 limit but only use a quarter of it, the bank may reduce your limit to reflect your usage pattern.

DOES IT MAKE A DIFFERENCE IF YOUR LIMIT IS REDUCED?

In a nutshell, yes.

When a bank reduces your credit limit, it has an immediate impact on your purchasing power and the amount you can borrow. A lower credit limit might also harm your credit score by raising your overall credit utilization. Let's imagine you had a $20,000 credit limit but just $5,000 in your account.

Your credit report shows that you're only using a fraction of your available credit. However, if the bank suddenly reduces your credit limit to $10,000, you're now at half your credit limit, which looks horrible and hurts your credit score.

Because credit use accounts for 30% of your credit score, it's easy to see how lowering your credit limit can affect your score.

It's vital to remember that while a bank can lower your credit limit for any reason, they can't do so and then charge you an over-the-limit fee if you're already over your new level. The bank is required by law to provide you at least 45 days after notifying you of the lower threshold before charging you any fees.

WHAT SHOULD YOU DO IF YOUR LIMIT HAS BEEN REDUCED?

When their credit limit is reduced, most individuals believe there is nothing they can do about it, but this is not the case. The first step is to contact your creditor and request a meeting with a representative.

Because the limit was usually lowered by a computer algorithm rather than a human, speaking with a live representative is an ideal approach to learn why this happened, whether it was an error, and whether your old limit may be reinstated.

Remember:

When you phone, be kind, and say how long you've been a client and that you've never missed a payment if that's the case.

Consider shifting the balance to a card with a larger limit if your new lower limit has put your credit utilization in a bind. If you've been looking for a new credit card, now is the time to look for one that offers 0% interest on balance transfers.

Keep in mind, though, that obtaining new lines of credit will lower your credit score.

What you don't want to do is close your old card to spite the bank, because if you have a long credit history there, wiping out years of on-time payments will have a negative impact on your credit score. Also, closing down that account reduces your available credit, so transfer the money and put up with it.

If you keep good ties with that bank and make on-time payments, there's a strong possibility you'll be able to increase your credit limit in the future if necessary.

When a credit limit is cut, it's also important to keep an eye on your credit reports to see how much of a hit you get. If your credit score falls, you can take efforts to improve it, such as using your card for minor expenditures like Netflix or coffee and paying it off each month to keep the account active and in good standing.

Finally, paying off the bill on the card with the smaller limit soon can help to minimize your credit utilization and improve your credit score.

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