Although most of us begin our credit journey
with one of the many starter cards on the market — and the tiny little credit
limits that come with them — a year or two of good credit habits will unlock
better credit cards, more perks, and higher credit limits.
Indeed, consumers with good credit and even
moderately sized incomes can receive credit cards with limits in the thousands
of dollars, and credit limits of $20,000 or more are not uncommon for the most
qualified cardholders.
But, making it to the big leagues of credit limits doesn’t mean you can enjoy five-figure spending credit lines indefinitely. High credit limits are a cardholder privilege — not a cardholder right.
In general, your credit limit is at the sole
discretion of your credit card issuer, and your issuers can raise — or lower — your credit limits as they see
fit. This right is typically listed in a credit card’s terms and conditions
and/or cardholder agreement.
If you have a secured credit card, you’re
likely safe from sudden changes, as secured cards usually have a credit limit
that is equal to the amount of the security deposit. That said, even secured
credit card limits can be subject to the issuer’s discretion.
Credit card issuers can not only change your
credit limit at any time, but they can usually do so without giving you any
warning. This applies to both increases and
decreases. So, if your credit limit is changed, often the only way you’ll know
is to log into your credit card account and check on your limit.
The primary exception to the lack of
notification is in the case that your credit reports are what spurred the limit
reduction; the Fair Credit Reporting Act (FCRA)
requires issuers to notify customers when adverse actions are taken as a result
of information from their consumer credit reports.
Additionally, the only real restriction on the
issuers’ ability to change your credit limits is that they can’t reduce your
limit to an amount below your outstanding balance and then start charging you
over-limit fees. You typically have at least 45 days from the time your limit
is reduced before you should see any fees for being over your limit.
Although credit card issuers don’t actually
need a reason to reduce your credit limit, they rarely do so without some sort
of impetus. The most common reason a credit card issuer reduces your available
credit is in response to sudden changes in your credit profile that increase
your credit risk.
Essentially, your credit risk is how credit
card issuers determine your rates, fees, and credit limits, with some influence
from your income, as well. High-risk cardholders are usually charged higher
rates and offered lower limits to reduce the potential losses to the issuer if
something were to go wrong with your finances.
Sudden increases to your credit risk are a
sign that you may be having financial trouble. Credit card issuers will often
try to limit their exposure to your increased risk by reducing your credit
limit if it spots any new red flags.
For example, if one of your credit card
accounts is suddenly reported to the credit bureaus as delinquent, this may
make your other credit card issuers nervous about the state of your financial
affairs. As a result, they may preemptively reduce your credit card limits to
protect themselves from potential losses if you become unable to make payments
on more accounts.
Another common reason to see your credit limit
reduced is if you aren’t using your credit card account often enough (or at
all) — especially if the card doesn’t charge an annual fee. Credit card issuers
don’t make money on cards that aren’t used; interchange fees and interest
charges are major sources of income for issuers, and neither can be collected
if a card isn’t used.
In other words, if you allow a credit card
account to go unused, the credit card issuer may feel that the credit you were
extended will be more profitable if allocated to other customers who use their
cards more frequently. (Store credit card issuers are particularly bad about
reducing credit card limits for low usage.)
At the other end of the spectrum, using your
card too much — i.e., having a card
that is maxed out or too near its limit — can also cause the issuer to drop
your credit limit. This goes back to the idea of limiting risk; credit card
users with maxed-out credit cards tend to be at a higher risk of default than
users who maintain low balances.
The biggest problem with having your credit
limit reduced — other than putting a crimp in any plans for big purchases — is
that it can negatively impact your overall utilization rate, especially if you
don’t have many credit lines of significant size to buffer the drop to your
overall available credit.
Basically, your utilization rate is the ratio of
how much credit you are using over how much credit you have available. A high
utilization rate indicates high credit risk — and vice versa. Credit scoring
models (and creditors) look at both the individual utilization rate of each
credit card, as well as the overall utilization rate across all of your credit
accounts. The higher your level of overall available credit, the less impact a
reduced limit should have to your credit score.
On the bright side, reductions to your credit
limit don’t have to be permanent. Just as issuers can reduce your limit at any
time, they can also increase your limit at any time. So long as you address
whatever issue led to the decrease in the first place, you can likely expect
your credit limit to (eventually) be increased once more.
Of course, how much of an increase you see
will depend on your specific situation. If your credit limit was reduced due to
low credit card activity, for instance, then regularly using your credit card
again may result in your original limit being restored gradually over time.
In some cases, you may be able to recover your
original credit line simply by calling the issuer and requesting that your
limit be restored. However, keep in mind that some card issuers may require a
hard credit inquiry to process a credit limit increase request, and the success
of your request will likely depend heavily upon the reason your limit was
reduced.
If your credit has been hurt, we've got your back. CreditRepair.com provides the tools and know-how needed to help you get your credit where it needs to be.
Carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.
Guest Article from BadCredit.org
