“How a Lower Credit Limit Can Impact Your Credit Score”

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Understanding Credit Limits and Their Impact on Your Credit Score

At O1ne Mortgage, we prioritize consumer credit and finance education. This post aims to provide an objective view to help you make the best decisions regarding your credit limits. For any mortgage service needs, feel free to call us at 213-732-3074.

Why a Credit Card Issuer Might Lower Your Credit Limit

If you rarely use a credit card or only utilize a small portion of your available credit, a credit card issuer might decide to lower your credit limit. Credit card issuers aim to minimize risk and may review accounts to see if credit limits should be reduced based on changes in a consumer’s financial behavior or general economic shifts. This risk-mitigation strategy can be unsettling when you receive a notification that your credit limit is dropping. Here’s what to do if that happens and how it could affect your credit scores.

Why Your Credit Limit Matters

Your credit limit is the maximum amount you can charge on a given credit card. Credit card issuers determine your credit limit based on your credit history, income, debt obligations, your history with that card issuer, and their business goals. A higher limit provides more spending power and helps keep your credit utilization ratio low, which can positively impact your credit scores.

Reasons for Lowering Your Credit Limit

Credit card issuers might lower your credit limit for several reasons:

• You are maxed out or overextended.
• Your account is inactive or rarely used.
• The economy is in turmoil.
• The card issuer needs to adjust its lending portfolio.
• The issuer detected a change in buying behavior.

In most cases, a credit card issuer must provide an adverse action notice when your credit limit is reduced. However, they are not required to give you any notice before doing so. If the reduced limit leaves your current balance above your new credit limit, you cannot be charged a penalty interest rate or over-limit fees for 45 days after you are notified of the new, lower limit.

What to Do if Your Credit Limit Is Reduced

If you’ve been notified that your credit limit is being reduced and you want a better understanding of why—and your previous limit restored—you can do the following:

• Reach out to the card issuer: This can help you understand why they reduced your limit. If you are paying in full and on time every month, you may be able to get your old limit restored.
• Use the card more often: If the reason for the credit limit reduction is because you seldom use the card, consider using it more often. Using the card for small purchases and then immediately paying off your balance could help you maintain the higher limit—and potentially help you earn rewards such as cash back, depending on the card.
• Go elsewhere: If your credit is good, you can ask other credit card issuers about increasing your credit limit. You can also consider applying for a new credit card.

If you can’t get your old limit restored or existing limits raised, take a look at how you can restructure any balances you are carrying on cards to reduce the impact on your credit. Aim to use no more than 30%—and less is better—of your credit limit on any card to avoid hurting your credit score. A possible exception is if you are using a balance transfer credit card as a strategy to pay off debt.

How Can a Reduced Credit Limit Affect Your Credit?

A lower credit limit could potentially affect your credit score, even if you pay on time, every time. That’s because your credit utilization rate, the percentage of your available credit that is in use, has a significant impact on your credit scores. Keeping your credit utilization under 30% will reduce its impact on your credit score, and under 10% is better.

For example, if you have a lightly used credit card with a credit limit of $20,000 that you pay off monthly, and a second credit card with a $15,000 limit and a balance of $10,000, your overall credit utilization is 29%. If your credit card issuer lowers the credit limit of the first credit card to $12,000, your overall credit utilization would increase to 37%, potentially impacting your credit score negatively.

The Bottom Line

Having relatively high credit limits, with plenty of room on them, can help you maintain a good credit score. While credit limits can be lowered for reasons outside your influence, such as business goals or economic conditions, paying on time and keeping your card at least minimally active can help avoid it. If your credit limit is being lowered, consider applying for a new card or requesting higher limits on other cards to maintain a similar overall credit limit and protect your credit score.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you navigate your financial journey with confidence.

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