Commonly Asked Credit Limit Questions

Why Are Credit Limits Slashed by Credit Card Companies During
Periods of Economic Downturn?

Simply put because banks and credit card companies are looking to de-risk their credit portfolios during times of economic uncertainty. When the macroeconomic data changes so do books of many large banking institutions. As soon there is an “air” going about that a recession could be coming many companies look to “clean up their books” and remove and de-risk any unfavorable loans or lines of credit. If you are considered a bad credit risk, this could potentially increase your interest rate or cause your line of credit to get cut. Revolving lines of credit are the riskiest extensions of credit a lender can give (they have the highest default rate). Moreover, credit limits tend to get cut at the end of a credit cycle.

Can This Hurt Your Credit if This Happens to You? Why Can This Be Damaging?

Yes. Having a lower total credit availability will hurt your credit and will also increase your average utilization rate. The less available credit you have the higher you average utilization rate will be (depending on how much of a balance you carry at any given point during the month). Utilization rate (or debt to credit) accounts for 30% of your credit score. So, if this number is too high it could have negative implications on your overall credit worthiness.

What Should You Do If This Happens to You?

You should first reach out to your creditor and ask why the limits were lowered and try to get them to re-instate the old limit. Otherwise, the best thing you can do (proactively) is to make sure you keep your utilization rate below 30% so it doesn’t negatively affect your score in the future. In other words, try to aggressively pay down your balances and maintain a low debt to available credit ratio. This will help counterbalance any associated negatives you might receive if your credit limit gets cut.

Are There Steps You Can Take to Get the Credit Company to Up Your Limit Again?

Yes. Demonstrate good employment history, use self-reporting credit boosters like Experian Boost, and re-verify your income whenever possible. If you are proactive about your credit, results will eventually show. It might not be instant but overtime you will be a winner if you practice good credit habits.

If the Company Refuses to Increase Your Credit Limit, How Can You Work to Repair Your Credit?

In this scenario, it is likely that you will have to work towards paying down your debt. If you are able to lower your reliance on revolving debt, you will become more credit worthy and the credit card companies will increase your limits again. Oddly enough, consumers with the best credit are typically ones that do not need credit or loans. By paying down debt you are in fact demonstrating this.