What To Do If Your Credit Limit Is Lowered

Young girl spending too much

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.

Your Credit Score Matters

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.

What You Can Do

  • Complain (Diplomatically) - If you find out that your credit score has been lowered, call the credit card company and ask to have your old credit limit restored. Be courteous. Remind them of how long you’ve been a customer and that you’ve handled your credit limit responsibly.
  • Transfer Your Balance - If your credit card company won’t work with you, consider transferring your balance to a new card. If you have another card with available credit, you can transfer all or a part of the balance to the other card to stay well below your credit limits. If you only have one card, consider shopping around for a new card with a higher limit. Just be aware that several “hard inquiries” on your credit report can further lower your credit score.
  • Consider a Smaller Bank - There is still a tremendous amount of competition for good quality borrowers. If you are unhappy with how you’ve been treated by a bigger bank, consider a local bank or credit union. They may be more willing to work with you than the larger banks. Just be aware that their willingness to work with you will depend on your credit score. You’ll need a score of at least 700 to get the best offers.

Don’t Do This

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.

Use Credit Wisely

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.

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