You’ve been paying on time and being a model cardholder – or so you thought. Then a letter comes in the mail, informing you that your credit limit has been cut and leaving you wondering how your bank could be so cold to a faithful customer.
During the Great Recession, this was a more common occurrence. In the midst of the economic downturn in 2008, Javelin Strategy & Research found that 62 percent of the top issuers had shaved their cardholders’ credit lines. Banks simply didn’t want consumers to have lots of available credit at a time when people were struggling financially, says Greg Meyer, community relations manager at Meriwest Credit Union. Meyer himself saw one of his longest-held cards (with a $20,000 credit limit) not just cut but completely closed in 2008.
Fortunately, these days, your credit limit is in less danger of getting slashed.
“It still does happen, but because the economy is stabilizing and credit card delinquencies are at an all-time low, it’s not happening as often as it was,” says Jana Castanon, spokeswoman at credit counseling agency Apprisen.
Still, there are still a variety of reasons a bank might reduce your credit line — and a variety of things you can do in response.
3 reasons your limit might be cut
Credit limit decreases generally happen when you’re making your issuer nervous. One of the following scenarios might apply:
1. You’re not treating your other accounts as responsibly.
Even if your behavior with the card that got cut has been above reproach, issuers regularly pull customers’ credit reports. If you’re slipping up with other accounts, who’s to say you won’t start doing the same with their card?
“They could see that there’s a collection account or that you are past due on other payments for a mortgage, installment loans or other credit cards,” Castanon says. “They might also see that you’re maxing out on another card, or that your credit utilization is high.”
2. You’re giving yourself too much credit
Having lots of cards with high limits can help you keep your utilization low and your credit scores high. But your bank might see it as potential debt – debt you won’t pay back if you lose your income.
“If you start applying for or receiving a bunch of new credit, or getting higher limits, some creditors might get a little nervous and reduce your credit line,” says Scott Bilker, founder of Debtsmart.com and author of “Talk Your Way Out of Credit Card Debt.” “They want to get paid. If they think you’re getting overextended, or that you could get overextended, they’ll cut your credit limit.”
You might also find that your bank cuts your limit on an existing card if it feels you’re putting too many eggs in its basket.
“If you get another card with the same bank, it’s going to raise the total credit limit with them, and they might not like that large number,” Bilker says.
3. You’ve changed
Some credit card providers utilize data mining to scan cardholders’ purchase habits for any signs of trouble, Meyer says.
“Let’s say you have someone who’s going to Macy’s quite a bit,” Meyer says. “Every month, the person goes to Macy’s and drops $100 or $200 and pays it back. Suddenly, they’re not shopping at Macy’s anymore but are going to Wal-Mart or the dollar store.”
That information, Meyer says, might suggest the cardholder is having income issues and prompt the card provider to “reduce their exposure” by lowering the credit limit.
No warning necessary
Whatever the reason your credit limit gets cut, the bank doesn’t have to warn you in advance.
Thanks to the Credit CARD Act, issuers do have to notify you 45 days in advance of significant changes to your account – APR changes, for example. Lowering your credit limit, however, isn’t considered a significant change under the law.
However, if a credit limit change would put you over your limit and trigger an over-limit fee, the creditor must give you a warning, according to the Truth in Lending Act:
A creditor may suspend account privileges, terminate an
account, or lower the credit limit without notice. However, a
creditor that lowers the credit limit may not impose an over
limit fee or penalty rate as a result of exceeding the new credit
limit without a 45-day advance notice that the credit limit has
Your card likely has fine print that says it can slash your limit at any time. For example, here’s what Citibank’s terms say about credit limit changes, based on the sample agreement it provided for the Consumer Financial Protection Bureau’s cardmember agreement database:
In addition to being annoying (and maybe a little insulting) a credit limit decrease can have credit score consequences. The major contributing factor here is your credit utilization, which ties into the “credit used” portion of your FICO score. This portion makes up 30 percent of your FICO score and rewards you for using a small amount of the credit available to you.
Reducing your available credit makes the credit you’re using look larger in comparison. And the corresponding score drop, Bilker warns, can put you in a bind.
“Now you look terrible to everyone,” he says. “That can lead to not being able to get new credit and fix the problem.”
It can also create a snowball effect with your other issuers.
“They might see your credit score go down and say, ‘Let’s cut his credit line before we’re in trouble,'” Bilker says.
A credit limit decrease can affect your credit in more delayed ways when you try to rebound from the cut. Applying for a new card to increase your overall credit limit, for example, might mean a hard pull on your credit reports, which lowers scores. Or, if you later ask your bank to lift your limit back up, that could also result in a hard pull, depending on the bank’s policies.
“I’ve seen it happen,” says Meyer, who was a bank manager for 17 years. “People would come in and ask for an increase in their credit line. It’s not that simple … We’d pull the credit report, we’d look at the debt-to-income ratio and see if they can still afford it and see if it’s something the bank or financial institution is comfortable increasing.”
What to do next
Angry about a credit limit cut?
“It’s the bank’s limit, and they can decide what their amount of risk is, where they can accept risk and where they cannot,” Meyer says.
Still, it’s important to get in touch with your issuer – both to investigate the reason for the cut and to negotiate.
“Any consumer needs to ask questions,” Castanon says. “Don’t just put your head in the sand. Go ahead and call [your card provider]. There might be a reason that they can explain. Just because they’ve done it doesn’t necessarily mean it has to be set in stone.”
The reason for the limit decrease could even be due to a mistake in your credit report – or a fraudulent account opened in your name, Bilker points out.
“If you have a good relationship with a bank, and everything’s been great for years, and this happens, you have to get to the bottom of it,” Bilker says. “It could be a symptom of a larger financial disease, one that you don’t even know you have.”
If the bank doesn’t give you a good reason for the decrease (or you don’t think its reason is very good), that’s where it pays to have other options (namely, other cards), Bilker says. That will give you negotiating power because, whether it’s via interest or swipe fees, your bank is making money when you use your card.
“The first thing I would do,” Bilker says, “is call the bank and say, ‘Can you put my limit back to the way it was? Or I’ll start using other cards. And we’ll have this discussion again after you haven’t made money off me for a year.’ ”
If you have more than one card with the bank, you might suggest another option – combining credit limits. If the card that got cut was your go-to card, a lowered limit might be a big inconvenience and put you in danger of exceeding your limit. You can help matters by transferring over the limit of a less-frequently-used card from the same bank.
“A bank can move your available credit from one card to the other, so if they cut one, they could take it from another card. It’ll be the same total. It’s not like you’re getting anything new back, but you can rearrange it,” Bilker says.
.. and what if the decrease was your fault? “Say you took out half your credit line, went to Atlantic City and lost it all,” Bilker says.
You’re not necessarily stuck with a low limit forever.
“That doesn’t mean that it’s over,” Bilker says. “You can start today making the right decisions. … In six months, you call them back. Then you go into the negotiations. But you first have to fix the problems. Time will heal all wounds.”