What to Do When Your Credit Card Limits are Cut

Like many Americans over the past few months, you may have opened up your credit card bills and paid them without noticing your available credit limits were lower.

According to Bloomberg Wealth, fourteen major U.S. lenders, including Citigroup Inc., JPMorgan Chase & Co., and Capital One Financial Corp., cut a total of $99 billion from their customers' credit limits in 2020, the effect of which was felt mainly in financially troubled households.

For these Americans, a reduction in their available credit can have serious financial consequences. When a credit limit is lowered, it means:

Your credit utilization rate goes up. Credit utilization is the percentage of your credit limit you're using, and it's always good to have low credit utilization. Ideally, you should aim for a utilization rate of less than 30 percent of your available credit. So if you have a $10,000 credit line and you've got a $3,000 balance, your credit utilization rate on that card is 30 percent. But if your lender decides to cut your credit limit to, say, $5,000, suddenly your credit utilization rate jumps to 60 percent. And when that happens...
Your credit score goes down. Your credit score is made up of five weighted factors: Payment history (35%), Credit utilization (30%), Age of credit (15%), Credit mix (10%), and Number of inquiries/new credit (10%). The utilization rate used in scoring encompasses all of your credit lines, but still, a significant increase in utilization of just one of your credit lines can have a negative effect on your credit score. Which means...
You may pay higher rates for credit. Especially if you've been working hard to build your credit or you're digging out of debt, having your credit lines cut inexplicably can be, well, infuriating, especially when you're trying to buy a home or a car, where rates are determined on your credit worthiness. A drop in your score can actually cost you thousands of dollars in interest over the years. Short term it can make life a little harder, especially during a time when you may need some breathing room financially.

A lender is not obligated to give you any notice if they decide to cut your credit limit unless the credit limit is being cut for an adverse reason, such as being late with a payment. Sometimes you'll discover your credit limit has been cut by looking at your card statement, or getting notice from a credit monitoring app.

Here are some steps you can take to avoid having your credit limits reduced and what you can do if they have been cut:

Stay on top of your credit. If you can pay your balances in full, that's great. If you can only pay the minimum balances, make sure you get those payments in on time. One late payment can be enough for a lender to slash your available credit. And be sure to check your available credit regularly to ensure your lender hasn't reduced it. If they have...
Call the lender and ask that they reconsider their decision, especially if there has been no change to your employment or income, you weren't maxed out on the card before they dropped the limit, and you have a history of making your payments on time. You'll may be asked about your current employment and income, as well as your housing costs (rent or mortgage), so have these numbers ready.
Keep some activity on your cards. Lenders are more likely to cut credit limits on cards that are rarely used, so make small purchases on them and pay them off in full in each month to put yourself at less risk.
Look to your credit union for credit. If the lender won't budge, it may be time to look in your wallet and ask yourself why a credit card from your credit union isn't in there. "Unlike the fourteen financial institutions that cut spending limits for their customers, credit unions were helping their members over the last year by keeping our rates low and offering programs like 'Skip a Pay,' LifeLine loans, and mortgage forbearances during difficult times," said Tom Becker, Hanscom FCU's chief lending officer. "Cutting credit limits that may adversely impact the credit health of our financially responsible members isn't something we would do. Here at Hanscom FCU we'll listen to a member and take their unique situation into consideration when extending credit."

Opening a new line of credit will result in a hard credit pull, which will cause your credit score to drop several points, but if you have good credit, the effect will be temporary. It may be worth it to increase your credit availability, not to mention give you access to a no-fee credit card that typically has lower rates than those offered by big banks. You can learn more about our credit cards here.

A balance transfer can be a great way to save money, reduce debt, and breathe a little easier. Here at Hanscom FCU, we’re always looking for ways to help our members save more money, so if you’ve got some high-interest credit cards, we can help!