When it comes to credit cards, the reality is that you don’t own your limit. The company lending you the money owns your limit. That means, if the credit company decides to increase or decrease that limit, they can do so without your permission. If your payment history is good, credit increases are usually granted when you ask. When your credit limit is lowered, there could be a variety of reasons. If you’ve recently experienced a reduced credit limit, I’m sharing 4 reasons why your credit limit was lowered.
It’s not fun to wake up and see your available credit (or unavailable credit) limit taken away, but you can always get it back. It won’t happen overnight. Being knowledgeable about why your credit limit was lowered in the first place can help you for the future.
Reason #1: A significant change in your purchase history
If you think your credit lender is not checking/monitoring your spending activity on a consistent basis, think again! Most credit card companies have a variety of tools that allow them to monitor activity on the credit accounts they issue. To help mitigate risk (for them, not you), if they see a drastic increase in your spending activity, the may reduce your credit limit.
Ultimately, the lender wants to ensure you can pay your balance back, in full and on time. If you make an extremely large purchase that they haven’t deemed you capable of paying back, they can slash your credit limit. The unfortunate thing about this is that they can slash your limit under what you currently owe. Meaning you may now have a $10,000 balance with a $11,000 limit, and the lender can cut that limit to $8,000, while you still have that $10,000 balance.
If that happens, make sure you can pay down the over-the-limit balance as quickly as possible. Failing to do so can drastically hurt your credit score. In fact, you should strive to get your balance to 30% of the available limit. Read 5 Tips for Increasing Your Credit Limits for some pointers on getting your credit to a place where your limits can go up!
Reason #2: Pressure from regulators
There are federal regulations in place to help prevent consumers and credit lenders from being overexposed to risk. If your credit history isn’t up to par, your credit card company may be receiving pressure from regulators to reduce their risk. As a result, your credit limit can be reduced.
It’s possible that the attack isn’t on you personally. If the credit card company is told to reduce their credit losses across the board, hundreds of consumers may be affected. It’s more than likely that consumers with poor credit history will be the ones most affected.
Reason #3: You haven’t used the credit account in a long time
Let’s say you pay your credit card balances in full each month. You are likely using one or two primary cards and keeping the remaining accounts at a zero balance. There’s nothing wrong with this, but it’s important to keep in mind that the credit accounts that aren’t being used can have their credit limit lowered.
Lenders want to ensure you are actually leveraging the available credit they are giving you. If you haven’t used a specific credit card in a long time, they can reduce the limit to help reduce their risk, to give to another consumer, or to ensure that if you do use their credit again, you must start re-building your spending history with them.
To avoid your credit limit being reduced on accounts you never use, use them occasionally. Once every six months should be a good rule of thumb. Just remember to pay the balance once you use the card! I would hate for you to forget that you used that card (because you rarely do), and then you miss the bill and have a late payment on the account.
Reason #4: Failing to pay your bill on time each month
As I mentioned earlier, if a credit card company decides to slash credit limits across the board, they are going to target those who aren’t very creditworthy. The best way to prove your creditworthiness is to pay your bill on time each month. You don’t have to take it as far as paying the balance in full (although that would help), but you do need to pay on time.
Think about this way: would you continue to loan money to a friend who has never paid you back on time? Probably not, and you have more le-way with your friend than you credit card company would have with you. You may not be able to control your credit limit being lowered, but you can do everything in your control to make sure you are a creditworthy borrower.
Related: 3 Credit Card Terms You Can Negotiate
Unfortunately, having your credit limit reduced is a sign that you are a risky credit user. Fortunately, you can use this unfortunate situation to make a change to your credit habits. You can make a change to become a creditworthy borrower! Have you ever had your credit limit lowered? Did any of the 4 scenarios above play a role? Post a comment below to share!