Since the financial fallout from the Great Recession, many banks have started lowering credit limits, even for customers with good credit and payment history. Lenders are tightening up outstanding risk and have scaled down credit limits to reduce the risk of default. Many banks use an automated algorithm that analyzes your spending to determine whether you are likely to become a credit risk. Changes to where you shop and how much you spend may send up a red flag indicating you’re in financial trouble. If you’ve received a notice that your credit limit has been lowered, here’s what you need to know.
If your credit score decreases, your bank may lower your credit limit. A lower credit limit changes your utilization ratio, which lowers your credit score. It’s a vicious cycle.
Don’t close your old account. Trying to get even by closing your account with the offending bank will only lower your total available credit and further damage your credit score.
If the limit on one of your cards is lowered, it could indicate that card issuers are starting to see you as a greater credit risk. They may be looking at where you are using credit. If you are using credit to pay for things like groceries and utilities, it may be a sign that you are in financial trouble.
Monitor your credit report at least annually. You can request a free credit report every twelve months from each of the three credit reporting agencies. Take a look at how many of your accounts have high balances in relation to credit limits. Try to keep your balance below 30 percent of your credit limit to prevent further damage to your credit score.