This story originally appeared on The Penny Hoarder.
If you’ve had to rely on a credit card recently to cover your expenses, finding out that your credit card company has lowered your limit is probably bad news.
Sadly, that’s the case for 1 in 4 U.S. credit cardholders who reported their issuer reduced the limit on at least one of their cards — or closed the card — according to a study by CompareCards.
And the news could come as a shock to many cardholders, who through the first quarter of 2020 have collectively seen their credit card limits climb. over a trillion dollars over the past six years.
But as economic uncertainties abound, credit card companies have cut available credit to limit their own losses.
What can you do if your credit limit has been reduced? (Wait, what’s your credit limit, anyway?) We’re here to help.
How to deal with a lower credit limit
Has your card issuer reduced your credit limit?
Or perhaps a better question to start with: Do you know your credit limit? Because if you don’t know your limit, it’s hard to know if it’s been lowered or why it matters. So let’s start by understanding what a credit limit is.
If you have a credit card, your issuer determines the maximum amount you can charge to the card – aka your credit limit – based on a number of factors including your income and risk. as a borrower.
If you are borrowing for the first time, credit card companies are unlikely to want to take a chance on you, so your credit limit could be a few hundred dollars.
But if you’ve been a loyal customer for years and have a habit of paying on time every month, the issuer could increase your limit to tens of thousands, even if you didn’t ask for an increase. .
So what’s the point of a credit limit, besides being able to spend a lot more if it’s higher? (Yeah, don’t do that.)
Your credit limit is part of the equation to determine your credit usage – and credit usage is a substantial part of your credit score.
The closer your balance gets to your limit, the more your score could be affected. To calculate your usage, divide your total balance by your credit limit.
If you’re trying to boost your credit score, most experts recommend keeping your credit utilization rate below 10%.
Let’s take an example.
Let’s say your balance is $700 on a card with a credit limit of $3,000. So $700/$3,000 = 23.3% credit utilization.
But if your credit card company lowered your credit limit to $2,000, you’d suddenly be using 35% of your credit, which could end up hurting your credit score.
A lower credit score could affect your ability to get loan approval – like for a car or a house – as well as the interest rates on those loans.
How to prevent a decrease in credit limit
You are not just a passive spectator in preserving your credit limit.
“Missing a payment or paying late could result in a reduction in your credit limit,” said Bruce McClary, vice president of communications for the National Credit Counseling Foundation in Washington, DC “But I want to emphasize the difference between missing a payment and not communicating with your creditor about it.”
If you contact the credit card company for permission to miss a payment through a deferment schedule or by participating in a difficult credit card program, you will be less likely to have your credit limit lowered than if you simply skip payments – which could also lead to penalties and possibly debt collection activities.
Federal law requires a creditor to give at least 45 days notice before imposing overlimit fees or penalties, so use this time to bring your balance to at least your new credit limit.
By working with your creditor, you will also avoid having your account shut down completely, allowing you to recover more quickly once your current financial difficulties are (hopefully) resolved.
So instead of putting your head in the sand, take advantage of this moment to become more proactive.
“I think these circumstances maybe remind us that we should log in and review account activity,” McClary said. “It doesn’t have to be day-to-day, but it could be a few times a week.”
And if you’ve had any financial missteps in the last six months – a missed or late payment, for example – chances are your credit card company has already lowered your limit to avoid additional risk during this uncertain time.
What to do if your credit limit goes down
OK, you know how to check your credit card limit, and it’s lower. Now what?
“Don’t panic if your credit card limit has been lowered — it doesn’t mean it’s permanent,” McClary said. “The next step is to contact the creditor and find out why.”
Ask for details about why the credit card company took this action:
- Is the lowering of the limit correct? (Mistakes can happen, after all.)
- Do you have a history of missed or late payments?
- Does your seniority as a client affect this decision?
- Was there a specific trigger that caused them to lower your limit?
You will need this information when deciding on your next move. From there, you have a few options.
1. Ask your credit card company to increase your limit
I’m not going to lie: this one could be long.
But consider starting by asking your credit card company to increase your credit limit to the previous amount.
“Ask if and how you can get them to reverse that decision,” McClary said. “Don’t expect a yes, but at least if it does happen, you may be pleasantly surprised – and if it doesn’t, you can continue the discussion on what other options are available.”
2. Play your cards right
Your credit card issuer isn’t the only company in town, so consider shopping around for an interest-free balance transfer.
Applying for a new card may not be an option if you have recently lost income.
“But there are ways to creatively shift the balance that could preserve that credit ratio,” McClary said.
Maybe you have another card in your wallet that you don’t usually use and that has room to absorb the short-term balance.
Using your credit cards responsibly can help build your credit history, which can also increase your credit score. Here are five ways to start building up credit while avoiding debt.
Let’s go back to our original example. Instead of putting all $700 on one card, can you spread the payments across multiple cards – putting your streaming service subscription on a card with a low credit limit while car insurance continues with a little more room?
One caveat about this strategy: while it can help preserve your credit utilization rate, you could end up paying more to cover all monthly payments and variable interest rates. It could also harm you if you use a credit card to accumulate points to qualify for benefits such as gift cards or cash back.
“It’s kind of a trade-off – is it worth spreading your credit card business over a wider range of cards, but then facing the possibility that you have to pay more for what you borrow?” McClary asked. “Each individual must weigh what they are willing to accept.”
3. Pay off your balance
If paying off your balance is an option, this could be a perfect way to clear the balance of accrued interest while reducing your credit usage.
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Also consider cash that may have been freed up unexpectedly, whether through a relief check or student loan forbearance. Every little gesture counts.
4. Ask for help
We understand: Talking to your credit card company about your options if your credit limit has been reduced can be frustrating and even a little intimidating.
This is when professional advice can really help.
Professional advice can help you prepare for discussions with your creditors by informing you of your rights and the options available to you.
“Before you have those discussions with your creditors … consult with a credit counselor about ways to get back to where you left off with your credit limit, if that’s your goal,” McClary said. “So you can go into these negotiations a little better prepared.”
Armed with the best options for your situation, you can put yourself in a position to survive these uncertain times. Besides, the sky is the (credit) limit.
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