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Credit Limits

Does a Credit Limit Decrease Hurt Your Credit Score?

A credit limit doesn't only dictate how much you can spend, but can also play a major role in your credit score. Credit utilization—which measures how much credit you're using relative to your limits—is the second most important aspect of your credit score. For that reason, high credit limits on the cards you use often can bring down your utilization and help you maintain higher scores.

If your credit limit decreases but your spending stays the same, your credit utilization will climb—potentially causing your scores to drop. Read on to learn more on how a credit limit decrease might affect your credit.

How Does a Credit Limit Decrease Affect Your Credit Score?

Revolving debt accounts, like credit cards and lines of credit, have a credit limit that puts a cap on how much you can spend. Each lender determines a credit limit when you open an account, but it may reassess your limit later based on various factors.

If a lender decides to reduce the credit limit on one of your accounts, your credit utilization ratio may spike, which can negatively impact your credit scores. Credit scoring models and lenders also consider your credit utilization across all your accounts to determine your overall credit utilization. When your credit limit on one account is reduced, your overall available credit shrinks as well. Here's how the math breaks down:

Imagine you have five credit cards. Each one has a $2,000 credit limit and $500 balance, so you'd have a total credit limit of $10,000 and total balance across all your cards of $2,500. To calculate your total credit utilization ratio, divide your current balance by the total of all your credit limits, or $2,500 / $10,000. In this scenario, the result is 0.25; multiply by 100 to get your utilization ratio: 25%.

Now imagine the credit limit on three of your credit cards gets cut in half. These reductions bring your total credit limit to $7,000. Apply the same math above and your new utilization ratio is 35%.

Though it's only a 10 percentage point change in your ratio, credit utilization contributes significantly to your credit scores, so changes to your utilization can cause a noticeable impact. If not paired with a reduction in overall balance, a decrease in your total credit limit will almost always increase your utilization ratio.

To keep utilization in check and avoid doing too much damage to your credit score, it's recommended to keep your ratio under 30%, but the lower, the better. Those with the top credit scores tend to keep their utilization ratio in the low single digits. That means vigilantly monitoring both your total utilization and the utilization on your individual accounts to make sure neither one climbs above 30%.

Why Might a Credit Limit Go Down?

A reduced credit limit on one of your accounts may come as a surprise since lenders are able to take this action without warning. Credit limit changes mostly impact credit cards, as lines of credit are often based on collateral and are therefore less volatile.

A credit limit may be lowered for any of the following reasons:

  • You report a reduction in your income. If your lender thinks your reduced income poses a risk to your payment ability, it may cut your limit to reduce its risk.
  • You never use the card, or use it only occasionally. An unused card may have its credit limit reduced if the lender feels it would cut down on risk. A lender may also cut down a credit limit if the cardholder's spending habits drastically change.
  • External economic circumstances encourage the lender to limit their risk exposure. In tough economic times, lenders may reduce credit limits to protect their assets from borrower default. When the economy is in a downturn, cardholders may begin to rely more on credit and be more prone to missing payments. To reduce its financial risk, a lender might bring down account limits.
  • You missed one or more payments. Missing a payment, or paying late, is a serious red flag for a lender. It may cause them to expect more missed payments in the future, so credit limits may be reduced to prevent a borrower from racking up too much debt they're not able to pay back.

What to Do After Your Credit Limit Decreases

If you notice one of your limits drop, contact your creditor immediately for more information. This reduction could be a mistake, but if it's not, you'll want to know why your limit was reduced.

Ask the creditor whether it has a policy for reissuing previous credit limits. If you catch it in time, you may be able to get it back. If not, you'll need to figure out why it was reduced and work toward remedying whatever caused it.

If you see your utilization ratio increase as a result of a credit limit reduction, focus on how you can bring it down before it impacts your scores too much. Here are a few things you can do to improve your utilization:

  • Reduce your balances. If you find you can't increase your overall limit, your best option is to reduce your balances. It will not only reduce your utilization, but also save you money in interest charges. If you have some savings, consider putting a portion of it toward your balances to reduce what you owe quickly.
  • Ask for a credit limit increase on another card. If you have more than one credit card, ask one of your other lenders for a credit limit increase. If they agree, it will raise your individual and overall limit.
  • Open a new credit card. When you open a new card, that card's credit limit will increase your overall total, which can enable you to maintain your overall utilization. But opening a new card won't on its own help the utilization of your other cards individually, and it's not a good idea if you've had difficulty managing credit cards in the past.

As you consider actions to take when a creditor decreases your credit limit, monitor your credit scores so you can see what your overall credit utilization is and how it's impacting your scores. You can get free credit monitoring from Experian that can alert you to changes in your credit.