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How to Navigate a Credit Limit Decrease

Many lenders are responding to the COVID-19 crisis by lowering limits on credit cards or deactivating unused accounts. Here's what you need to know to protect your credit score.

How does a reduced credit limit impact your score?

A reduced credit card limit can make a big impact on your credit score because it impacts your credit utilization rate. This rate is determined by the amount you owe on credit cards divided by your credit limit. With some scoring models, credit usage accounts for as much as 30% of your score.

Let’s look at a few examples of how this works. According to debt.org, the average American carries $8,398 in credit card debt; we’ll use this average for our examples:

  • If you have a $30,000 credit limit and you owe $8,398, your credit utilization rate is 28%. Most experts recommend using 30% or less of your available credit. With this utilization rate, as long as you are making on-time payments, you may not see a negative change to your credit score.
  • Now, let’s say your overall credit limit has been reduced to only $20,000. Your credit limit has gone down, but what you owe has not, and your debt remains $8,398. You’re now looking at a utilization rate of 41.99%. At this utilization rate, you will likely start seeing your credit score begin to drop.

What can you do to minimize the impact of a credit limit decrease?

When it comes to improving or maintaining your credit score, there are several things you can do to help:

  • Continue paying on time. Timely payments are one of the biggest contributing factors to a healthy credit score.
  • Pay off accounts that are closest to the credit limit. By paying down your maxed-out accounts, you will be doing yourself a big favor when it comes to your credit utilization rate.
  • Contact your lender. If your credit limit is lower and you feel as though it shouldn’t be, you can always speak with your lender to restore your previous limit. Nothing is guaranteed, of course, but it never hurts to ask. Keep in mind, when doing this, you may have credit inquiry hits on your report, which could change your score.

It’s important to remember, no matter where you find yourself in your financial journey, you have options. Keep these tips in mind, and you can help keep you and your credit score on track.

 
Eric Jordan
By Eric Jordan, GM Financial

Eric Jordan is passionate about helping others strengthen their financial savvy. He also spends a lot of time strengthening his dad skills as a father of four boys. It’s not uncommon to find Eric rearranging car seats in his Yukon XL, or playing “the bad guy” to the kiddos “superheroes.”

 

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