Most creditors are allowed to lower their customers’ credit limit without a legitimate reason, if written in the bank’s user agreement. It can happen to people with good credit and people with bad credit, but those who’re late for their credit card bill payments, have filed for bankruptcy or have accounts with collections are at a higher risk of getting their credit limit lowered.
But a change your credit limit can happen without a warning and come with dire consequences. For one, lower credit limit translates into a risk of higher credit utilization, which, according to finance experts, should be kept around 30 per cent in order to boost your credit score.
This means that you should aim to spend less than $900 if your credit card has a limit of $3,000. If for some reason, the limit has been lowered to $2,000, this could increase the risk of hurting your FICO score.
If your bank has suddenly changed your line of credit, here’s what you can do to cope with the situation.
Call Your Creditor
The first thing you want to do if your credit limit has been lowered is to call your bank ask for the reason behind the sudden move. Most banks change the customers’ line of credit if they fear that they’re becoming a credit risk. In some cases, the decision can also be triggered by unusual spending activity, a mistake in your credit report or even the possibility of identity theft.
Before calling, prepare to defend yourself in case your creditor needs any convincing that they made a mistake in lowering your limit. When making a case for yourself, cite your previous record of timely payments, a recent bonus or increase in salary.
If you’ve made a delayed payment for a valid reason such as a personal or medical emergency, make sure that you mention that as well. If your account representative isn’t able to help you, politely request to talk to their supervisor instead.
Pay Off Outstanding Balance
One of the reasons why your bank may have decided to lower your credit limit is if your credit utilization ratio is too high; this means that you’re spending way more than your creditor has allowed you to. If your outstanding balance exceeds the limit on your card, there is a higher chance that your credit score will suffer in the future.
In order to prevent this, check if your credit utilization ratio has exceeded 30 per cent after your bank reduced your credit limit. If so, pay down some of your balance to keep your credit score high. This is especially important if you’re planning to apply for mortgage or a loan in future. The higher your credit score the more likely you become to receive a loan with low interest rates.
Transfer to a Different Card
If your new line of credit threatens to put your outstanding balance over the credit limit, it may be a wise move to transfer your balance to a different card until you are able to pay it down. Some banks offer credit cards with 0% balance transfer perk that allows you save money on any additional interest payments that could result from transferring outstanding balance to a different credit card.
If you only want to transfer only a partial amount of your outstanding balance to a new card in order to keep the credit score high, a no balance transfer fee card could be a great option to do so.
A common mistake people make after finding out that their credit limit has been lowered is canceling the card altogether. This could work against your favor if you’re trying to boost your credit score. Even a card with a lower credit limit is contributing to your FICO score which is helpful in getting a loan with attractive interest rates in future.
Your FICO score is affected by a number of factors including having several accounts open simultaneously, longer account history with timely payments and higher credit limit.