Credit card issuers may reduce credit limits
Reduced credit limit can come for many reasons
Just as a consumer can be granted an extended credit line on their credit card, the reverse is also true. In certain cases, a bank can decide to reduce a cardholder's credit limit. There a number of reasons why a cardholder could end up with a lowered line of credit.
The primary reason for a smaller line of credit would be due to the cardholder's irresponsible use of an existing credit card. When the cardholder exhibits certain behaviors that suggest he or she is a credit risk, the issuer can decide to lower that person's credit limit.
How reduced credit limit occurs
Cardholders know that paying a credit card statement after the due date triggers a late fee. But slapping the consumer with a late fee may not be the only result: Late credit card payments could also cause a reduced credit limit.
Similarly, going over the limit on an existing line of credit could inspire the bank to cut their limit going forward. The outcome may be the same for paying the credit card statement with a check that bounces or from a checking account with insufficient funds.
Also, consumers with bad credit could have their credit limit trimmed. The issuer may at some point decide that the individual's bad credit suggests they are a risk for repayment on a too-generous a line of credit.
Even if consumers' credit use does not warrant a lower credit score, negative changes in their credit profiles could also drive banks to cut borrowers' credit line. Any negative items suggesting the cardholder may borrow more than they are capable of paying back is likely to put the issuer on the defensive.
Meanwhile, a higher debt-to-income ratio (meaning the cardholder's income stays the same but they borrow more money) could be a tip-off that they are unlikely to be capable of handling their existing line of credit. That, too, could mean a lowered credit limit.
In short, any behavior or change that signals the cardholder could get into trouble as a result of their existing credit limit could inspire the bank to drop that credit limit down to a level that seems more appropriate. Banks do this to protect themselves when records indicate consumers borrow more than they can pay back.
Published: June 29, 2007
- Tax refund delayed? It’s best to wait – Many taxpayers will receive their refunds later than usual this year. How can you fill the void? And should you? ...
- Pay off credit card debt with tax refund? 5 questions – Question No. 1: Do you have an emergency fund? ...
- Resolution keepers: 5 who transformed their financial lives – Five success stories of those who stuck to their financial goals ...