4 steps to fix an unexpected credit limit decrease

Unfortunately, that’s the case for one in four American credit card holders who’ve reported that their issuer slashed the limit on at least one of their cards — or closed the card — according to a study by CompareCards.

And the news could come as quite a shock to many cardholders, who until the first quarter of 2020 collectively watched their credit card limits climb more than a trillion dollars over the past six years.

But as economic uncertainties abound, credit card companies have been reducing available credit to limit their own losses.

What can you do if your credit limit has been slashed? (Wait, what is your credit limit, anyways?) We’re here to help.

How to deal with a credit limit decrease

Did your card issuer lower your credit limit?

Or maybe a better question to start with: Do you know your credit limit? Because if you don’t know your limit, it’s tough to know if it’s been slashed — or why it’s important. So let’s start with understanding what a credit limit is.

What is a credit limit?

If you have a credit card, your issuer determines a maximum amount you can charge on the card — aka your credit limit — based on a number of factors, including your income and your riskiness as a borrower.

If you’re borrowing for the first time, credit card companies may be unlikely to want to take a chance on you, so your credit limit might be a few hundred dollars.

But if you’ve been a loyal customer for years and have a history of paying on time every month, the issuer could increase your limit into the tens of thousands — even if you didn’t ask for an increase.

So what’s the big deal about a credit limit, besides being able to spend a lot more if it’s higher? (Yeah, don’t do that.)

Your credit limit is part of the equation in determining your credit utilization — and credit utilization accounts for a substantial part of your credit score.

The closer your balance gets to your limit — anything above 30% — the more of a hit your score could take. To figure your utilization, divide your total balance by your credit limit.

Pro tip

If you’re trying to build your credit score, most experts recommend you keep your credit utilization ratio under 10%.

Let’s look at an example.

Say your balance is $700 on a card with a $3,000 credit limit. So $700/$3,000 = 23.3% credit utilization.

But if your credit card company cut your credit limit to $2,000, you’d suddenly be using 35% of your credit, which could end up hurting your credit score.

A lower credit score could affect your ability to get approved for loans — like for a car or house — as well as the interest rates on those loans.

How to prevent a credit limit decrease

You’re not simply a passive bystander in preserving your credit limit.

“Missing a payment or paying late could trigger a reduction in your credit limit,” said Bruce McClary, vice president of communications for the National Foundation for Credit Counseling in Washington, D.C. “But I want to point out the difference between missing a payment and not communicating with your creditor about it.”

If you reach out to the credit card company to get permission to miss a payment through a deferment program or by entering a credit card hardship program, you’ll be less likely to have your credit limit lowered than if you simply skip payments — which could also result in penalties and eventually debt-collection activities.

Pro Tip

Federal law requires a creditor to give at least 45 days notice before imposing over-the-limit fees or penalties, so use that time to get your balance down to at least within your new credit limit.

By working with your creditor, you’ll also avoid having your account shut down completely, which will allow you to recover more quickly after your current financial difficulties are (hopefully) resolved.

So instead of burying your head in the sand, take this moment to become more proactive.

“I think maybe these circumstances serve as a good reminder that we should be logging on and looking at account activity,” McClary said. “It doesn’t necessarily have to be day-to-day, but it could be a few times a week.”

And if you’ve had any financial missteps in the past six months — a missed or late payment, for instance — there’s a good chance your credit card company has already lowered your limit to avoid additional risk during this uncertain period.

What to do if your credit limit decreases

OK, now you know to check your credit card limit… and it’s lower. Now what? “Don’t panic if your credit card limit has been lowered — it doesn’t mean that’s permanent,” McClary said. “The next step is to contact the creditor and find out why.”

Ask for specifics about why the credit card company took this action:

Is the limit decrease correct? (Mistakes can happen, after all.)

Do you have a history of missed or late payments?

Does your length of time as a customer affect this decision?

Was there a specific trigger that caused them to lower your limit?

You’ll want this information as you decide your next move. From there, you have a few options.

1. Ask your credit card company to raise your limit

Not gonna lie: This one might be a long shot.

But consider starting by asking your credit card company to increase your credit limit to the previous amount.

“Ask if and how you can have them reverse that decision,” McClary said. “Don’t expect a yes, but at least if it happens you can be pleasantly surprised — and if it doesn’t, you can continue the discussion about what other options are available.”

2. Play your cards right

Your credit card issuer isn’t the only company in town, so consider shopping around for a zero-interest balance transfer.

Applying for a new card might not be an option if you’ve recently lost income.

“But there are ways you could creatively move the balance around that could preserve that credit ratio,” McClary said.

Perhaps you have another card in your wallet that you don’t typically use and has room to absorb the balance in the short term.

Pro tip

Using your credit cards responsibly can help build your credit history, which can also boost your credit score. Here are five ways to start building credit while staying out of debt.

Let’s go back to our original example. Instead of putting all $700 on one card, can you spread out the payments over multiple cards — putting your streaming service subscription on a card with a low credit limit while the car insurance goes on one with a little more room?

A word of caution about this strategy: While it may help preserve your credit utilization ratio, you could end up paying more to cover all the monthly payments and varying interest rates. It could also hurt you if you’re using one credit card to rack up points to qualify for benefits like gift cards or cash back.

“It’s sort of a trade off — is it worth spreading out your credit card activity across a broader range of cards but then facing the possibility… that you’ll have to pay more for what you’re borrowing?” McClary asked. “Each individual has to weigh what they’re willing to accept.”

3. Pay down your balance

If paying down your balance is an option, this could be an ideal way to wipe out the interest-accruing balance while decreasing your credit utilization.

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We have plenty of ideas for ways to make extra money, but also consider cash that may have been freed up unexpectedly — whether by a relief check or student loan forbearance. Every little bit helps.

4. Ask for help

We get it: Talking to your credit card company about your options if your credit limit has been cut can be frustrating and even a little intimidating.

That’s when professional advice can really help — fortunately, we happen to have a list of sources for free financial advisers.

Seeking professional advice can help you prepare for discussions with your creditors by finding out what your rights are and what options are available to you.

“Before having these discussions with your creditors … consult with a credit counselor on ways you can get back to where you were with your credit limit, if that’s your goal,” McClary said. “Then you can go into those negotiations a little bit better prepared.”

Armed with the best options for your situation, you can put yourself in a position to survive these uncertain times. And then, the sky’s the (credit) limit.

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Catch her on Twitter @TiffanyWendeln.

This was originally published on The Penny Hoarder, a personal finance website that empowers millions of readers nationwide to make smart decisions with their money through actionable and inspirational advice, and resources about how to make, save and manage money.