Tips for Handling a Credit Limit Cut

Your credit limit is an important feature of your credit card because it controls how much you can spend on your credit card without being charged a penalty. If you’ve opted-out of having over-the-limit transactions processed, then you won’t be able to make any transaction that would put you over your credit limit. On the other hand, if you’ve opted-in, then you may face a penalty for going over your credit limit.

Credit Limit & Your Credit Score

Your credit limit, specifically how much of it you’re using, also effects your credit score. The more of your credit limit you’re using, the more your credit score will be negatively affected. Ideally, your credit card balance will be less than 20% of your credit limit. Generally, any balance above 30% of your limit starts to hurt your credit score.

Benefits of Checking Your Credit Limit

Your credit card issuer sets your credit limit and has the ability to change your credit limit. Credit card issuers will typically send a letter telling you about the credit limit change, but the letter is sent at the same time of the change, not before it. So, you may get an embarrassing surprise at the cash register if you try to use your credit card not knowing your credit limit has been cut. If you make a habit of checking your credit limit before making a purchase, you can get an earlier notification if your credit limit is cut.

Why Credit Limits Get Cut

Credit card issuers reduce credit limits for several reasons. You may have high balances on your other credit cards, making you a more risky borrower. Or, if you’ve been late on another credit card payment, your credit limit could be slashed. Not using your credit card regularly is another trigger that could lead to a credit limit cut. If your credit limit is reduced, call your credit card issuer to find out why. You may be able to talk them into increasing your limit or least find out what you have to do to get your credit limit restored.

Consequences of a Credit Limit Reduction

Unfortunately a credit limit cut could have negative consequences, especially if your credit card has a balance on it. If your credit limit is cut to the point that your credit card balance is more than 30% of your credit limit, you’ll probably experience a loss in your credit score. Fortunately, you can usually recover these lost points by paying your balance down.

A lower credit limit means you can’t charge as much on your credit card. If you have regular expenses that you normally put on your credit card, you’ll have to find another way to pay for these purchases. Or, if you rely on your credit card for emergencies, you’ll have to start up an emergency fund since your credit limit may not be enough to handle the cost of the emergency.

If your credit limit gets cut because of late payments or high credit card balances, don’t apply for another credit card until you’ve fixed these. It’s likely that a new credit card application will only be declined.