How Could Your Credit Limit Be Lowered?
According to the Fair Credit Reporting Act, credit card companies have the right to lower credit limits at will. They may do so when a cardholder appears to be in financial trouble. If you have high debt and only send the minimum payments, the company may shorten the limit.
Or, if you haven’t used the card in a long time, the company could lower your limit or even close the account.
Another reason could be the economy.
Companies are more likely to extend larger limits when the economy is doing well and vice versa.
For example, if the economy was in a good position when you applied for the card, you may have gotten a higher credit limit. If the economy turns lower, the Credit card companies can move your limit down!
This was the case for many in 2020 with the pandemic.
When the COVID-19 pandemic hit, companies began to reevaluate credit lines. A July 2020 LendingTree survey found that 34% of cardholders had at least one of their credit cards limits reduced.
This is common practice for companies when economic recessions hit. Companies do this to mitigate risk with defaults during the economic downturn.
Banks and credit companies will do something called “chasing the balance” with customers with large debts. This usually means reducing a customer’s credit limit as they pay it off to prevent further debt.
Other than problematic credit history and economic instability, companies may adjust credit limits based on their own financial circumstances and capital reserves.
The Truth in Lending act does make sure the bank tells consumers when a credit limit decrease would trigger an over limit fee. It’s a comforting rule, but most financial institutions will waive the fee and go ahead with the credit limit decrease.
The Bottom Line
It’s a nuisance to have your credit limit decrease. It rarely happens to those with good credit history, but events out of your control could see your credit card limits lowered.