Will Your Credit Limit Be Cut?

In most cases, credit card issuers don't randomly cut your credit limit. However, there are some circumstances that could lead a card company to lower your credit limit. For example, a late payment or request for credit card debt relief could result in the issuer reducing your limit. A lower spending limit reduces how much total debt you can accrue with that card, which reduces the issuer's financial risk.

Issuers might also cut your credit limit if you're not using your card enough. This allows the card company to extend more credit to other people who use their cards more.

Issuers have the right to lower your credit limit at almost any time. They can also reduce your limit so that you have no credit to use. Most issuers notify you if your credit limit is reduced, but they are only legally obligated to do so in certain situations. 

Not only does a lowered limit mean you have less credit to use, it can also lower your credit scores. Here’s why credit card companies lower credit limits, the consequences, and what you can do about it if it happens to you.

Why Would Your Credit Card Company Reduce Your Limit? 

Card companies can reduce your limit for pretty much any reason. Typically, it's to reduce the company's financial risk, though it may also be to use its resources better. Here are some of the most likely factors that could result in a reduction to your spending limit.

Changes to your financial situation or card use

Any changes—to your credit score, income, or card usage—that give the issuer concerns about your ability to pay your bill could lead to a lower credit limit. For example, if your credit score drops because you missed a payment, issuers might reduce your spending limit. This could happen even if you missed the payment with a different card company.

Regularly maxing out your cards or going over your spending limit can also be red flags to issuers that you're trying to take on too much debt. This can lead to their reducing your credit limit.

Inactivity on your account

Every card company has a finite amount of credit it can offer its customers. It wants to offer that credit to the customers most likely to use it, since that's how card companies make money. If you have a card you rarely use, the company may reduce your limit, or even close your account. This frees up credit for people more likely to put it to use.

You don't need to put a lot of purchases on your card to keep it active. Just use it to pay a small monthly bill, for instance, then set up autopay to ensure you pay the full credit card bill on time each month.

Internal risk assessments

Credit card companies sometimes re-evaluate their business to ensure they are exposed to the right level of risk. These internal audits can reveal red flags that prompt your card company to reduce your limit—even if you haven't done anything “wrong.”

Economic factors

If they have concerns about economic conditions, card companies may reduce how much credit they extend to their customers overall. For example, if there is a major recession or other event that rocks the global economy and creates more risk, your card company may cut credit limits for many cardholders. 

Participation in a debt relief program

If you participate in certain kinds of debt relief programs, such as a debt management plan, your card company may reduce the amount you can spend or close your account. This isn't necessarily a bad thing, because if you're undergoing credit card counseling or taking other steps to become debt-free, you may not want access to a lot of credit.   

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Laws and Consumer Protections When Your Creditor Lowers Your Limit

Your creditor can reduce your credit limit pretty much whenever it wants. It can even reduce your credit limit down to your current balance. This would mean you can't use the card again until you pay down some of the debt. If that happens, you can appeal it with your creditor. Otherwise, you have to accept the reduced limit or close your account. In any case, you're still responsible for repaying your balance.

Creditors do have to follow some rules, however. These are primarily set out in the Fair Credit Reporting Act (FCRA) and Equal Credit Opportunity Act (ECOA).

Your creditor typically has to tell you it lowered your credit limit

The creditor has to tell you it reduced your limit (and why) any time that change has to do with your credit report. Creditors must do this within 30 days via an “adverse action” notice. The notice explains the reason(s) your credit limit was lowered, or tells you you can request an explanation. It should also tell you how to check your credit reports, including how to dispute  incorrect information.

You can't be charged over-limit fees for 45 days

An unexpected credit limit reduction could mean you go over your new limit without knowing you have. The credit card company can't charge you an over-limit fee or enact a penalty interest rate until 45 days after it’s given you notice of the reduced credit limit. And it can only charge a fee if it has given you notice and you’ve opted into over-the-limit transactions. The 45-day window gives you time to adjust your spending according to your new limit.

How Is Your Credit Affected if Your Credit Limit Is Cut? 

The main way a credit limit cut can impact your credit scores is through your credit utilization ratio, which is credit used versus credit available. A decrease in your available credit can increase your credit utilization ratio and hurt your credit score.

Here’s how it works: You divide your card balance by your total credit limit to get your credit utilization. So, if you have a $200 balance and a $1,000 credit limit, you have a 20% credit utilization. If you have a $500 balance and $1,000 credit limit, that's a 50% utilization rate.

If your card company reduces your limit from $1,000 to $500, your new utilization rate is 100%. Credit cards with 100% utilization are considered maxed out, which typically causes significant credit score damage.  

Credit-scoring models look at the utilization of each credit card individually, as well as your overall credit utilization for all of your credit card accounts together.

Freedom Debt Relief isn't a Credit Repair Organization and doesn't provide, or offer, services or advice to repair, modify, or improve your credit.

When Credit Limit Cuts Don't Matter Much

It's a good idea to check your credit if you notice a negative change to one of your credit accounts. Whether you need to take any more action than this depends on what you find on your report. If your credit report is all clear, then there's a good chance you can just move on. Here are a few signs you shouldn't worry about a lower credit limit:

• You didn't receive an adverse action notice. In this case, the change likely resulted from not using your card enough, or from circumstances outside of your control.

• You don't use that card much anyway. One common reason issuers cut credit limits is that you aren't using the card enough. In this case, the lower limit shouldn't impact you much at all.

• Your spending limit still suits your needs. For instance, a cut from $10,000 to $5,000 won't impact you much if you only really spend $500 a month on the card, and pay in full each billing cycle.

• You don't carry large balances on your credit cards. Half of the utilization equation is your card balance. Zero divided by anything is still zero, so your utilization rate won't spike if you aren't carrying a balance when your limit is cut.

• You're actively focused on paying down your debts. A lower credit limit might help you spend less while you work on getting your balances under control.

What To Do If Your Credit Limit Gets Cut

If the credit limit cut doesn't affect your ability to use the card, then you can continue as normal. If the credit limit cut negatively impacts your finances, you have a few options.

Appeal the credit limit cut with your creditor

You can try contacting your creditor directly to appeal the credit limit cut. While that’s not guaranteed to have an impact, you may be able to get your credit limit reinstated in some cases. If there was a change to your credit report due to a mistake, for example, you may be able to correct the issue and get back to your previous limit.

Here's how to appeal a credit limit cut:

1. Find out the reason for the cut. This should be listed on the adverse action notice if one was sent.

2. Create an action plan. Figure out how to allay any concerns your creditor may have about a change to your circumstances.

3. Make the call. Stay polite and professional during the call.

Open a new credit card account

A new card can add to your available credit, which might help reduce the impact of a limit cut to your credit utilization. Scoring models look at both individual and overall utilization, so more available credit can reduce your overall utilization rate. This option works best when your limit was cut due to inactivity or circumstances outside of your control. You may want to avoid opening new credit cards if you're actively working to pay down your debt.

Note that opening a new card means an inquiry on your credit record, and lowers the average age of credit. Both could lower your credit score.

Refinance your credit card debt with a loan

If you have cards with high utilization and high interest, an installment loan to consolidate debt might be a good option, particularly if you can qualify for a loan with good terms and lower interest (installment loans typically have lower interest rates than credit cards). Moving debt from credit cards to an installment loan could help your utilization rate. 

Using one loan to consolidate the debt from multiple credit cards can simplify your debt repayment, and it often reduces your monthly debt payments.

Prioritize paying down your high-utilization credit cards

The snowball and avalanche debt repayment methods prioritize debt with the lowest balance or the highest interest rate, respectively. But when your credit limit gets cut, you may need to prioritize your highest-utilization card—at least until you pay down the balance a bit.

Decreasing your card utilization can have an immediate positive impact on your credit scores. This can be handy if you're trying to get a consolidation loan or another credit product.

Don't close accounts (if it’s avoidable)

You might be tempted to close your credit card if your limit has been cut. If the card charges an annual fee and you don't use it much, this could be the right move. 

Cards without an annual fee should generally be left open, however. You definitely want to pay off the balance, but then you should typically leave the card account open, because closing a credit card account can have a negative impact on your credit scores. Like a credit limit reduction, closing a card removes available credit, which hurts your utilization rate. 

Creditors also like to see well-aged credit accounts and long credit histories. The older your credit history, the better it looks to creditors and credit-scoring models. As long as your cards aren’t costing you money—or tempting you to overspend—it’s usually good to pay them off and leave them open.

Protect Your Credit Score and Access to Credit

A reduction in your credit limit can make things tougher to manage, so you should try to avoid it if you can. Some credit limit cuts happen for reasons outside of your control. But you can show your card company you're a good customer and reduce the chances of their reducing your limit with a few simple steps:

• Pay your credit card bills on time, all the time.

• Keep your balances—and utilization rates—low.

• Maintain a stable, or increasing, income.

• Use your cards regularly, at least for small purchases.

There's no guarantee your credit limits will never get cut. However, these steps may make it less likely that your credit card company reduces your credit limit.