Do you depend on your credit card for day-to-day purchases? A sudden drop in your credit limit can throw your finances out of gear, in addition to bringing down your score. Reduced limit increases your credit utilization ratio, which will have a negative impact on your rating.
The fact of the matter is that banks have the authority to increase or decrease the limit extended to you at any time and without any explanation. Before we look at the steps you can take to restore your limit and bring up your score, let us understand the reasons behind the reduction.
Why Was Your Limit Lowered?
A Negative Change in Your Spending Pattern
If you have a history of making small regular transactions using your card, but suddenly indulged in some big-ticket purchases, your bank will consider this as a break from your pattern.
Any unannounced change in your spending habit will trigger a fraud alert, forcing your issuer to implement counter-measures. One of the ways that banks protect you from fraud is by reducing your Credit Card limit.
You Have Missed or Made Late Payments
Has your financial situation changed, affecting your record of on-time payments? When there is an unfavorable change in your repayment style, you become a high-risk entity for the bank. As a result, your limit can be reduced.
Even if your bank has forgiven your late payment, it will affect your score. If your credit rating takes a hit for any reason, you could be stuck with a lowered spending limit.
Maxed Out Your Card
Utilizing more than 30% of your Credit Card limit or maxing out your card is one of the most common reasons for a cut. A high utilization score reflects your dependency on your card, which brings into question your repayment ability. All these factors could result in the bank bringing down your spending limit.
Even if you have maxed out a card from a particular bank, a different issuer can reduce your limit because there is a good chance that you might max out your other cards as well.
Protection from Economic Instability
In order to reduce outstanding risk, many banks have taken to lowering credit limits. If the economic climate is not favorable to extend Credit Card limits, you could face a cut.
What Can You Do If Your Limit Has Been Reduced?
Get in Touch With Your Bank
The first thing you must do is contact your card issuer and understand the reason behind lowering your limit. If the change is due to a break in purchase pattern, you can give an explanation for the same and check if you can have your limit restored. It would also help if you make a case for yourself and tell the bank of your credit record.
Check Your Credit Card Score
Check your credit report for any errors or incorrect entries. A change in your score could be the reason for the bank lowering your limit. If your score has dropped due to a late payment, ensure that you notify the bank and bring up your score over the next few months.
Calculate Your Credit Utilisation Ratio
One of the repercussions of having your limit revised is a high credit utilization percentage. Even though you have been careful not to use more than 30% of your limit, a reduced limit will directly result in a high utilization ratio.
In order to prevent a further dip in your score, you need to pay off a percentage of your outstanding amount to restore your utilization ratio. Now, you could be tempted to pay off the entire amount and close your card for good. This plan can backfire because your score will drop further due to short Credit Card history.
As a rule, financial institutions cannot revise your limit and immediately slap you with a fine for exceeding your limit. You will have time to transfer your balance on another card, preferably one that offers 0% balance transfer, and ensure that you don’t overshoot your limit.
It will also help if you use your card regularly for small purchases and pay off the amount in full each month. This way, you will be using your card at least two to three times a month, and repaying the debt you owe on time. Thus reducing the risk you pose to the banks as a borrower.