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You recently received an alert indicating that your credit card's limit decreased. That may be because you recently closed a credit account, or perhaps your card issuer decreased the amount of credit on your credit line. It's a common occurrence in the life of your credit history. Here's what you need to know about it—and what you should do next.
How Does a Credit Limit Decrease Impact Your Credit Score?
Typically, a decrease in your credit limit may result in a dip in your credit scores. That's because a big part of your credit score calculation is based on your credit utilization ratio, or the amount of credit you're actively using compared with the amount of credit you have available to you.
Your credit utilization ratio is calculated by adding all your credit card balances at any given time and dividing that by your total credit limit. For example, if you have a combined $2,000 balance on all your cards, and your total credit limit across all your cards is $10,000, your utilization ratio is 20%.
When you close a credit account or the limit on one of your credit accounts is lowered, your total credit limit drops. So if your total limit across all cards was $10,000 and you closed a card with a limit of $2,000, your total credit available is now $8,000. But your balance is still about $2,000 on all your cards. That means your credit utilization just jumped from 20% to 25%.
Experts say that most credit scoring models ding your score if your utilization rate is above 30%. So it's smart to aim for a utilization rate under that—but don't expect your score to magically jump up if your utilization is at, say, 29%.
Think of it as more of a sliding scale. The higher your utilization ratio, the more your credit scores will take a hit. To be on the absolute safe side and achieve the absolute best scores, you'll need a credit utilization ratio of 10% or less.
How Can You Minimize the Impact of a Decreased Credit Limit?
Even if your credit limit went down, there's no need to worry. There are steps you can take to minimize the impact of a lower limit on your credit score.
1. Pay down your debt.
Start by looking at your credit card spending. Are you carrying a balance on any of your credit cards? If you can pay down some of your credit card debt and keep those cards open, your utilization ratio will go down.
Of course, that is easier said than done. But if you're having a hard time eliminating your credit card debt, you can find good tips to get you started here. Develop a plan to pay off the debt over time, and your credit utilization ratio will go down as well.
2. Consider opening a new credit card.
Another way to increase your overall credit limit is to add a credit card to your wallet. Check out Experian CreditMatch™ to find out which cards you qualify for and best suit your needs. Of course, you'll want to ensure that you keep your credit balances low on any new cards and pay your account on time every month.
3. Request a credit limit increase on a current credit card.
Some credit card issuers can instantly grant an increased credit limit on an existing credit card. To see if you qualify, call your issuer and request a small increase, or log into your card issuer's website to see if they offer an instant increase request button. If your account is in good standing, they may be able to grant an increase even without making an inquiry on your credit report.
When Will Your Credit Score Stabilize?
If your score went down because of a credit limit decrease, it will rebound if you make the right moves. Focus on paying down your debt and making on-time payments. While there is no set timeline, your score will likely rebound within a few months. If you add new credit to your credit file, the hard inquiry may cause your score to dip temporarily, but it will recover quickly. In the long run, an increased credit limit will likely help your scores.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.