Are you at risk of having your credit limit lowered?


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Don’t assume your credit limit is set in stone.

Key points

  • Your credit card company sets a maximum limit on the amount you can charge.
  • In some cases, card companies may reduce your credit limit, which negatively affects your credit score.
  • Your limit could be lowered if you don’t use your card often or start engaging in risky behavior like paying late.

If you have a credit card, you also have a limit on the amount you are allowed to charge. Card companies decide the size of your line of credit based on many factors, including your income and credit score.

In some cases, however, this limit may actually change once you become a customer. There are even circumstances where a credit card company might end up lowering the limit and leaving you with less available credit. Here’s why it could happen — and why it has serious consequences.

When might a credit card company reduce your credit limit?

In general, most credit card companies have wide discretion as to when they can lower your limit. And they can do it even if you don’t want them to.

Most card companies won’t reduce your line of credit if you use the card regularly and are responsible for your payments. However, card companies may lower credit card limits under certain circumstances. Here are some common examples of when you might be at risk of having your credit limit lowered:

  • If you don’t use your credit card often: Credit card companies are limited in the total amount of credit they can extend to customers. If you’ve left a card inactive and you rarely charge anything on it, the card issuer may not want to waste that credit available to you. They could significantly reduce your spending limit, or even close your card entirely in these circumstances.
  • If you show signs of risky borrowing: If you max out a credit card, start paying late, or your credit score drops drastically, it can be a red flag to lenders that you’re engaging in high-risk borrowing behavior and it there may come a time when you are in over your head and unable to pay. As a result, the card issuer might reduce the credit you have to limit the risk they face if you were to default on your debt.

Card issuers might also adjust your line of credit in the event of general economic turmoil and/or if they just want to adjust their loan portfolios. But, more often than not, a reduced line of credit is targeted by your specific spending behavior with the card.

Why is a reduced credit limit a problem?

If your card company decides to lower your credit limit, that could be a big deal because it could hurt your credit score.

You see, the second most important factor in determining your credit score is your credit utilization rate. The credit utilization rate is the difference between the credit you have and the amount of credit you actually use. So if you charged $500 on a card with a $1,000 limit, your usage rate would be 50%.

If your credit card company reduces your line of credit, your ratio changes and you end up using a higher percentage of your available credit. And that’s bad news, because a lower ratio is better and anything over 30% can take a big hit to your score.

Because of the risk to your credit, it’s a good idea to avoid letting old cards sit idle and to make sure you’re not doing anything that causes your card issuer to reduce the amount they’re on loan. to allow you to borrow.

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