Your credit card limit can be lowered without warning — what to do if this happens

Credit card limits can occur during financial emergencies. (iStock)

During financial emergencies, the spending limit on your existing credit card could be reduced.

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Credit card companies can change the terms of your credit limit if there is activity that indicates risk, said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization. “Most commonly, that involves missing payments without special deferment arrangements in place or suddenly charging up to or beyond the assigned credit limit,” he added.

Creditors also pay attention to a declining credit score (bad credit), poor credit history or unemployment, said Dean Kaplan, president of The Kaplan Group, a Los Angeles-based commercial collection agency.

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The Truth in Lending Act (TILA) requires creditors to serve 45 days advance notice when making changes to your interest rate and other account terms, but there is no similar requirement to limit credit cards in most cases. The only exception occurs when the reduction will result in spending limit penalties.

“When creditors are assessing their risk, they may opt to reduce a cardholder's credit card credit limit or just close the account altogether,” said Jim Triggs, CEO of Money Management International, a Texas-based nonprofit debt counseling organization. “This is done to mitigate their potential risk during economic uncertainty like we are in today with COVID-19’s impact on our economy.”

What to do if your credit card limit is lowered

Here's what cardholders should do if their credit limit decreases and how the limit reduction can impact their credit score.

1. Open a new credit card

If your credit score is still above average, consider opening a new credit card. You can start by researching and comparing different types of credit cards — whether it's a secured credit card, balance transfer card, cash rewards card, or beyond — through Credible.

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Contact other credit card companies or creditors who have not reduced their lines of credit and ask if the credit limit can be increased.

2. Obtain a personal loan 

Personal loans are another option for consumers facing financial hardships.

Most online personal loan lenders will provide pre-approval without impacting your FICO score with a hard credit inquiry and often have interest rates that are lower than a credit card. If you’re interested in a personal loan, use Credible to compare personal loan interest rates to find the best offer.

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3. Check your credit report

Check your credit report to see if there are any reasons or mistakes that would lead to a lower credit score. If you're confident in your credit score and it appears to be accurate, then take a moment to consider getting a new card that works better for you.

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However, if you do spot mistakes, then you'll want to have a written dispute and provide a copy to your credit card issuer, Kaplan said.

A portion of your credit score is determined by your debt-to-income ratio and any reduction of your credit limit that occurs while you are carrying a balance means your score could be lowered. This is especially true if your balance will comprise more than 30 percent of your overall credit limit after the change is made, McClary said.

Credit limit reductions can negatively affect a cardholder's credit score. If a consumer owes $1,000 and has a $5,000 credit limit, they would be using 20 percent of their credit limit, said Leslie Tayne, a Melville, N.Y. attorney specializing in debt relief.

“If their credit limit was reduced to $2,500, their utilization would jump up to 40 percent,” she said. “The higher the utilization and less available credit, the lower the credit score.”

You can prevent card issuers from decreasing your credit limit by checking your credit score on a regular basis. Avoid going over 30 percent of your credit utilization ratio, which is the relationship between the amount you owe and your credit limit and pay off debt in a timely manner.

Sometimes consumers are not responsible for the fact that their credit line was reduced, Triggs said. “At times like these it may be a result of the overall potential economic downturn,” he said.

4. Re-examine how you're using the card

What consumers can control is how they use the card. If a consumer starts taking out cash advances, that could be a sign to creditors that the consumer is struggling financially now or could face more personal finance challenges in the future. Missing payments or paying late are other red flags to a card issuer.

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“These behaviors could indicate more risk to the creditor,” Triggs said.

Large, sudden purchases or cash advances because could trigger the card issuer to look at the use of the card, Tayne said.

“Try to only use credit cards for everyday purchases, so that you have no problem paying the bill in full each month,” she said.