Why was my credit limit cut?

By Emma Lunn

You've been making your credit card payments on time every month -- so why did your credit card company just send you a letter informing you that it's going to cut your credit limit?

Here are some reasons your limit may have gotten cut -- and what you can do about it.

Can they do that?
When you take out a credit card, the provider will set a credit limit. This is the maximum amount of debt you can have on the card before your spending is blocked. Yet that limit isn't set in stone. Credit card contract small print allows lenders to lower your limit or, in some cases, withdraw credit altogether. cut-credit-limit

Possible reasons for the cut
Banks and credit card providers are often reluctant to give specific reasons to customers who have had their limit cut -- and simply point to their terms and conditions which state they are allowed to do this.

"The most common reason for a credit limit cut is a significant drop in your credit rating, which suggests you are becoming a more risky customer," says James Jones, spokesman for Experian.

Ways you inadvertently damaged your rating could include:

  • Taking on more debt: If you've entered into other loans and debt obligations since you opened the card, your issuer might see you -- and your high credit limit -- as a greater risk. After all, if you've got a lot more debt to repay, what guarantees that you can still handle your credit card debt?
  • Missing payments: Even if you are making your minimum credit card payments on time, a skipped payment on another card or loan can ding your credit score -- and, if your issuer checks up on your credit and finds out, it might revoke your comfortable credit limit.
  • Infrequent use: Banks will sometimes slash your limit on a card you use infrequently. In this situation you might be wise to accept the reduction as too much available credit could hinder you chances of getting credit elsewhere.

What do if your limit is cut
Having your credit limit cut can be a big inconvenience if you're planning a large purchase. Other borrows may feel aggrieved that they are no longer considered as creditworthy as they once were.

If your lender notifies you of a credit limit cut and you don't understand why, get in touch and ask for an explanation. It's possible the lender could change its mind -- particularly if you supply it with up-to-date information about your circumstances, such as a salary increase or reduction in other debts.

The credit card company may not agree to restore your original limit, but you might be able to negotiate a compromise somewhere in the middle. If it still won't budge, consider taking your business elsewhere.

"If they refuse to reinstate your credit limit and you are not happy with this, you could try shopping around other providers -- but be careful, Jones says. "If your circumstances have led to a fall in your credit rating, applying for more credit could actually make the situation worse."

So before striking out in search of a better card, it's a wise move to have a look at your overall borrowing. Paying down some of your debts, if possible, will make you more attractive to lenders -- who might reward you with a higher limit. If you do decide to apply for a new credit card, choose the card wisely and make sure you meet the lender's eligibility criteria, as too many rejections will make it harder to get credit elsewhere. Don't cancel your card before you pull your credit report to check for possible errors, and check your credit score. If your credit score is below average, you will have a harder time finding a new credit card with a reasonable interest rate and credit limit.

Having the opposite problem?
The tightening of lending criteria and credit limits is more prevalent during the poor economic conditions. However,  some cardholders could encounter the opposite problem by having their credit limits raised whether they ask for it or not.

Although this might not seem like a problem, it increases the amount of available credit you have -- and may hinder your chances of borrowing elsewhere because the ability to rack up lots of debt may also look risky to lenders.

Borrowers can ask for their credit limits to be reduced at any time -- which may be a shrewd way to both improve your credit score and remain disciplined in your spending, as long as you keep your debt limit well below 30 percent of your credit limit.

See related: What happens if you miss a credit card payment?, UK consumers find credit cards useful -- but confusing

Published: 30 August 2012