A credit limit decrease can happen because your spending habits changed, or if your good credit is mixed up with someone else’s bad credit.
Just as a credit card issuer can raise your credit limit – because you requested it, or the issuer wants to reward your loyalty – it can also reduce the amount you’re allowed to borrow. The reasons why a card issuer would reduce the amount you can charge vary, but credit limit decreases often happen because a cardholder is suddenly seen to be at a higher risk of default.
Banks can also lower credit limits for multiple customers to decrease risk exposure amid economic uncertainty. During the Great Recession, about 20% of U.S. banks cut credit limits for prime customers and 60% of them did so for non-prime cardholders, according to the Fed.
And there have been signs from both card issuers and consumers that credit limits are being trimmed down during the COVID-19 pandemic. For instance, Bloomberg on Aug. 28 reported that Capital One had been rolling back customers’ credit lines amid an uncertain outlook for further federal pandemic aid.
While federal law contains some protections related to credit limit decreases, banks generally have free reign to cut your credit limit as they see fit.
“There are some rules and exceptions, but generally speaking [banks and issuers] can increase your limit and decrease your limit without notice,” said Ruth Jackson Lee, a consumer attorney based in Florida. “They don’t have to provide any explanation.”
See related: My credit limit was (almost) cut without warning
Reasons for a credit limit decrease
How does a credit limit decrease affect your credit?
A credit limit decrease can hurt your credit score by increasing your overall credit utilization if you’re carrying a large balance on your card. Credit utilization accounts for 30% of your FICO score, and a maxed-out card can lower your score by 45 points.
It might seem unfair to have your available credit lowered and your score damaged without your knowledge, but there are ways to get your issuer to reconsider.
What are your rights?
An issuer can make any changes it wants to your card’s terms as long as that doesn’t violate your cardholder agreement or federal regulations. And current law doesn’t really insulate consumers from credit limit decreases or any resulting credit score damage.
However, the Fair Credit Reporting Act requires an issuer to send a consumer an adverse action notice for any action it takes based on information contained in a credit report. So, if another person’s troubled account history is mistakenly added to your credit report, and your issuer lowers your available credit as a result, the issuer would have to notify you of that change.
Additionally, there are certain CARD Act provisions that can protect you from fees if your card gets maxed out as a result of a credit limit cut. Under the law, your issuer is prohibited from charging an over-the-limit fee within 45 days of the credit limit decrease if it leaves your balance higher than the new limit.
But it’s rare that an issuer would reduce your limit to less than what you’ve already charged with your card. And Lee said issuers sometimes waive the amount you owe on top of your newly lowered credit limit if it makes financial sense for them or it helps them comply with federal rules.
“There may be situations where a credit card issuer will waive certain fees, accrued interest or debts to facilitate implementing a lower limit for business purposes,” she said.
A negative change in your credit use can spook your issuer
If you’ve been a responsible borrower, but suddenly begin to miss payments or ring up much higher balances than you have in the past, it could raise a red flag.
“If you use your cards and pay them off every month, then all of a sudden you start running a balance, you’ve changed,” said Ed Mierzwinski, senior director at the U.S. Public Interest Research Group. “They’re going to say, ‘Why has he changed?’ and that’s why they’re maybe going to cut your limit.”
Mierzwinski said if you keep your credit utilization at or below 30% and always pay on time, a credit limit decrease is unlikely. But maxing out a card – even if it’s not from the same issuer that’s reviewing your account usage – can increase the odds of a limit cut.
“You can’t just keep one card in good standing,” Mierzwinski said. “You’ve got to keep all your cards in good standing. They’ll look at your use of other cards, and they’ll weigh it on the predictability that their card is going to be the next to be maxed out.”
A decline in your credit score and account inactivity are other factors that can spur a limit cut. Personal finance analyst J.R. Duren said Bank of America dropped the limit on his Cash Rewards card by $2,000 at a time when his score fell. He also hadn’t used the card in about a year.
Other people could be making you look like a risky borrower
A sudden, uncharacteristic change in your credit habits doesn’t necessarily implicate you. If a thief steals your card and rings up fraudulent charges in your name, that could spur your issuer to decrease your limit if not caught and reported. Similarly, an identity thief can open new credit lines in your name, unbeknownst to you, and issuers with whom you already have card accounts can get spooked if those phony accounts are used for spending sprees.
A credit report mix-up can also result in a limit cut. If a credit bureau mistakenly mixes your file with that of another consumer – perhaps because you have the same name – that person’s troubled credit history could make you look like a bigger credit risk than you really are.
See related: How to remove negative items from your credit report
How to get your old credit limit restored
Contacting your issuer by phone is the first step toward trying to get your credit limit restored. Ask the customer representative for an explanation. What you do after that depends on the reason for the limit cut.
If you’ve recently suffered a financial setback that prevented you from making a payment on time or keeping your balance at a reasonable level, explain the situation. Lee also recommends letting the issuer know how you plan to get back on your feet.
“Life happens, and if you call them and explain, ‘This is what happened, but there’s the plan’ you’d be surprised how helpful it is in dealing with these credit card companies,” she said. An issuer may work with you to restore your credit limit if certain actions occur over a period of time, such as reducing your balance to a more acceptable level, or making on-time payments regularly for six months or more.
Another option is to write a goodwill letter, which can also prompt an issuer to remove a late payment from your credit report. However, this option could take longer, and you may not even get a response from the issuer.
A phone call can also get your credit limit restored if you discover an error or a fraudulent account. But the first thing you should do is file disputes with the issuer and the major credit bureaus – Experian, Equifax and TransUnion – to correct any errors and mitigate other damage.
“Being able to show the creditor that the issue has been corrected on the consumer reports is extremely helpful,” Lee said.
Your issuer is not required by law to restore your original credit limit. But if you’re denied and you want to press on, Lee suggests filing a complaint with the Consumer Financial Protection Bureau – especially if the card company is being unhelpful in any way.
“It’s fair to be your own advocate and say ‘Well, I’m going to have to file a complaint,’” she said. “Nobody likes to be that person … but it is an effective way if the company’s just giving you the runaround.”
Credit limit decreases are rare, but don’t put yourself at risk
It’s relatively uncommon for issuers to cut cardholders’ credit limits. But it does happen, and there are a few simple ways to make sure you’re never a target.
Check your credit report and your credit score regularly to monitor for errors and fraudulent accounts. You are entitled by law to one free credit report per year from each of the major credit bureaus, and it can be obtained at AnnualCreditReport.com. Due to the COVID-19 pandemic, the three bureaus are offering free credit reports on a weekly basis through April 2021. Additionally, many credit card issuers make cardholders’ credit scores available for free in their online accounts.
If your card management habits have changed for the worse, it may be time to adjust your budget or seek the help of a credit counselor.
The best way to prevent a decrease in your credit limit – and to keep your credit score in good shape – is to pay your balances in full on time, every time, and use the card regularly to keep it active.