Why the Hell Did My Credit Limit Go Down?

Two experts explain why credit card issuers cut my credit limit (and perhaps your credit limit)

As somebody who writes about personal finance, I strive to keep on top of my credit by watching my credit report, my credit score and my credit balances. But even when you’re an “expert,” you can be caught by surprise.

In the past several weeks, I’ve had my credit limit reduced on three or four credit cards. What???? How could this happen to me?! I almost always pay my bills on time, and I almost always pay more than the amount due every month. (Hey, I’ve got to be honest.)

Well, it’s not all about me. It’s more about the pandemic-clobbered economy. To get a better grasp of why this happened to me — and why it’s happening to millions of other Americans — I reached out to two credit experts who also are former coworkers: Ted Rossman, industry analyst at CreditCards.com, and Matt Schulz, chief credit analyst at LendingTree.

Card issuers avoid risk

“Banks are slashing credit limits and closing cards altogether for one reason: risk,” Schulz tells me. “With so much joblessness and economic upheaval, it’s really difficult for lenders to know who is risky and who isn’t, and when that happens, lenders just tend to retreat into their shells.”

Schulz explains that if you weren’t using available credit during good times, credit card issuers don’t necessarily want you tapping into it during rough times. He points out that you can be holding down a high-paying job and enjoying a 740 credit score one day, but be out of work and on financial shaky ground the next.

“It makes lending much more unpredictable,” Schulz says, “and banks hate that.”

In the case of one of the credit card issuers that lowered my credit limit, they told me it shrank because I hadn’t been using the card very much. According to Rossman, this sort of scenario makes card issuers uncomfortable.

“They’re not making much money off of you,” Rossman tells me, “but they worry you may suddenly lose your job and run up a bunch of charges that you won’t pay back.”

How to handle or head off credit-limit decreases

In other cases, someone’s credit limit might be slashed because they’ve exhibited risky behavior, such as maxing out a card or making late payments, he says. Rossman offers this advice regarding credit-limit decreases:

  • If your credit limit has dropped, contact the card issuer’s customer service department and ask that the decision be reversed. He says this tactic worked for him recently when one of his credit limits was cut.

  • Try to avoid them by using all of your cards regularly, even if it’s just a small purchase every few months.

  • Make all of your payments on time.

  • Keep balances below your credit limit.

Your credit limits and your credit utilization ratio

Why does all of this matter? Rossman explains that your credit limits can affect your credit utilization ratio, which is a key factor in computing your credit score. If you suddenly have less credit available, this ratio will go up, assuming your card usage remains constant, and your credit score will go down, he says.

So, how can you turn around this ratio situation? Rossman gives these two recommendations:

  1. Request a higher limit on a different card. There’s no guarantee that this strategy will work, but what have you got to lose?

  2. Bring down your credit card balances. One way to do this: Make an extra payment in the middle of the month to lower the balance before the next credit card statement comes out, since the utilization ratio usually is determined by your statement balances.