Are You at Risk of Your Credit Limit Being Lowered?

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KEY POINTS

  • Your credit card company sets a maximum limit on how much you can charge.
  • In some cases, card companies may lower your credit limit, adversely affecting your credit score.
  • Your limit could be lowered if you don't use your card often or if you start exhibiting risky behavior like paying late.


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

If you have a credit card, then you also have a limit on how much you are allowed to charge on it. Card companies decide how large your line of credit should be based on many factors, including your income and your credit score.

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

When could a credit card company lower your credit limit? 

In general, most credit card companies have broad discretion in when they can lower your limit. And they can do this even if you don't want them to. 

Most card companies won't reduce your credit line if you use the card regularly and if you are responsible in making your payments. However, card companies can and do lower credit card limits under certain circumstances. Some common examples of situations where you might be at risk of having your credit limit lowered include:

  • If you do not use your credit card often: Credit card companies are limited in the total amount of credit they can extend to customers. If you've let a card go dormant and you rarely charge anything on it, the card issuer may not want to waste that available credit on you. They might dramatically lower your spending limit, or even close your card altogether in these circumstances. 
  • If you are showing signs of risky borrowing: If you max out a credit card, if you start paying late, or if your credit score drops dramatically, these can be red flags to lenders that you are engaging in high-risk borrowing behavior and 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 available to you in order to limit the risk it faces if you were to default on your debt. 

Card issuers could also adjust your credit line if there is overall economic turmoil going on, and/or if they simply wish to adjust their lending portfolios. But, most often, a reduced credit line 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, this could be a big issue because it could hurt your credit score.

See, the second most important factor in determining your credit score is your credit utilization ratio. Credit utilization ratio is the difference between credit available to you versus the amount of credit you actually use. So if you've charged $500 on a card with a $1,000 limit, your utilization ratio would be 50%. 

If your credit card company reduces your credit line, then your ratio changes and you end up using a larger percentage of your available credit. And that's bad news, because a lower ratio is better and anything above 30% can lead to your score taking a big hit. 

Because of the risk to your credit, it's a good idea to avoid letting old cards go dormant and to make sure you don't do anything that prompts your card issuer to reduce the amount it is willing to allow you to borrow.

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