What to Do After a Credit Limit Decrease

A credit limit increase comes with big benefits. It lets you spend more with your card and earn more points, cash back, travel, and other rewards.

A credit limit increase also gives you more credit so you can make larger purchases with your card. It allows you to carry a higher balance if that’s appropriate for you. It may boost your credit score and enable you to get better offers from lenders for other types of credit, such as a mortgage, car loan or personal loan. For some, a higher credit limit confers social status and bragging rights.

A credit limit decrease, on the other hand, may feel like a gut punch or even a punishment. Suddenly, you can’t charge as much, your rewards earning potential shrinks, and your credit scores may drop, raising your cost for other types of credit.

Fortunately, there’s a remedy. Understanding how credit limits are determined, why yours was lowered, and what you can do about it may undo some of the damage and help you recover the benefits and status (if that matters to you) that you’ve lost.

Credit cards are a form of revolving debt. You can use a card to repeatedly spend (i.e., borrow) up to your limit for that card, pay off all or part of your balance, and then spend up to your credit limit again, repeatedly. The higher your limit, the higher your balance can be at any one time.

Credit limits exist for good reason. Your card company doesn’t want you to charge more than you can afford to repay, and you don’t want that to happen either. Your limit is a safeguard of sorts for both you and your card company.

Your credit limit is also an important factor in your credit utilization ratio, which influences your credit scores. The more of your available credit you use, the higher your ratio will be.

This chart shows how a lower limit can affect your utilization ratio:

You won’t be able to spend as much if your card’s limit is lowered, and if your level of spending stays the same or increases, your utilization ratio will rise as a result.

A 100% ratio means you’ve hit your limit and maxed out your card. If you carry a balance and your limit is lowered to the amount of your balance or less, your card will be maxed out — even though you didn’t spend more.

A high ratio, say, 30% or more, can hurt your scores because it suggests you need to use a lot of your available credit. Your credit scores matter because lenders use them to decide how much you can borrow and what interest rates to offer you for your loans.

If your limit was lowered and you’re concerned about how that will affect you, your first move should be to call your card issuer and ask why your limit was changed. The answer may — or may not — be about your personal credit habits.

Either way, you can ask to have the decision reconsidered, or if that’s a no-go, ask what you can do to get the higher limit reinstated in the future.

Next, you may want to check your credit reports, which contain the information that’s used to calculate your scores. You can get free copies of your reports once each year from AnnualCreditReport.com.

Reviewing your reports and asking the credit bureaus to correct any errors that you find can improve your scores. You can also obtain your scores through your bank or credit union or a third-party website that offers this service. The best way to protect your scores is to make your payments on time.

Another good step to take if your limit is lowered is to review your overall credit situation.

Are any of your cards maxed out? Have you made your payments on time? Do you have enough available credit to meet your needs and keep your utilization level low? Should you apply for a new card to increase your available credit?

Knowing the answers to these questions can help you determine your next steps.

Card companies can legally lower your limits any time they want. They may do so because you made a late payment or your credit scores dropped.

They may also do so because:

• You missed a payment
• Your card usage spiked
• Your utilization ratio spiked
• You maxed out your card
• You exceeded your limit
• You used an excessive number or amount of cash advances
• Your income went down
• You filed for bankruptcy
• You use your card rarely or never
• Your card company decided to lower limits for certain groups of customers to reduce the risk of defaults

Card companies don’t have to notify you in advance if they change your limit. They do have to wait at least 45 days after they change your limit before they can charge you a fee or penalty rate if your balance is more than your new lower limit.

That gives you about six weeks to pay off all or part of your balance or transfer it to another card before you are hit with a fee or penalty rate.

It’s not always easy to predict how any change to your personal finances will affect your credit scores.

Generally speaking, if you normally use a modest amount of your available credit, a lower credit limit may not affect your credit scores at all. If you normally use a large part of your available credit, a lower limit may have a bigger impact.

One strategy to offset the impact is to get a new balance transfer card and transfer all or part of your balance from your existing card to your new one.

For example, suppose you have one card with a $5,000 limit. Your balance is $1,000, which gives you a  20% utilization ratio. If your limit was lowered to  $2,000, your ratio would jump to 50%.

If you opened a new balance transfer card with a $2,000 limit and you transferred half of your balance —  $500 — your utilization on each card would drop to 25%.

If applying for a new credit card will make you more likely to spend more, it may be better for you to pay off part of your balance rather than get another card to improve your utilization ratio.

Taking steps to raise your credit scores can help you get approved for a higher limit on a card you already have or help you get a new card with an even higher limit in the future. You’ll then be able to enjoy the spending power and many benefits a higher credit limit can offer you.