How a lower limit could affect you
The good news is that if you’ve been making regular payments and have a stable credit score, you shouldn’t take it too personally if your credit limit is lowered. Credit card issuers may simply decide to reduce credit limits even for customers in good standing as a preventative safety measure due to something like COVID or a recession.
The bad news is that a reduced credit limit could affect your credit score. Thirty percent of your credit score is based on something called credit utilization. Credit utilization is the amount of available credit you’re using across all of your credit cards. Ideally, to maintain a good credit rating, you should keep your utilization ratio below 30%. Unfortunately, when the credit limit on one of your cards is reduced, it causes your ratio to rise.
For example, if you have a combined credit limit of $10,000 across your credit cards and an overall balance of $2,500, your ratio is 25%. If your credit limit is reduced significantly such that you now only have $5,000 in available credit, your $2,500 balance increases your ratio to 50%.
How much a credit limit decrease will affect your overall credit rating will depend on factors like how many cards you have, the length of your credit history and whether or not you make regular payments.
What you can do about a reduced limit
Reach out to your provider
The first thing you should do if your credit limit is decreased is to contact your credit card issuer. If you have a solid credit score, make regular payments, and have been a customer with your financial institution for a long time, there’s a chance your issuer may reverse their decision and reinstate your original limit or at least not cut it as much.
Increase limits on other cards
If you have a good and/or long relationship with a different credit card provider, you could reach out and ask them to increase your credit limit. Though, given the economic uncertainty at the moment, it could be hard to get approval for an increase even if you’ve got a great credit score.
Apply for other cards
If you’re going through a rough patch and want the safety net of easily accessible credit, you could apply for another credit card. Keep in mind that, as with asking for a higher credit limit, it may be more difficult to get approved for a new credit card at the moment. Furthermore, applying for a new card could result in an inquiry on your credit report, which then may negatively impact your credit score. For this reason, it’s important to only apply for credit cards for which you have a good chance of getting approved.
If you know you’ll have to rely on your credit card to make ends meet, choose a low-interest card that will help ensure your debt doesn’t balloon out of control until you can pay it off fully.
Strengthen your credit score
The higher your credit score, the better chance you’ll have of weathering a reduced credit limit. One way to rev-up your credit rating is through the responsible use of a credit card.
Another way to build your credit is to consider a credit building tool. KOHO’s Credit Builder costs $10 a month for a 6 month subscription ($7 for KOHO Essential or KOHO Extra) and can also help strengthen your credit score. Each month, KOHO uses pre-deposited dedicated funds as a “repayment” on a no-fee line of credit and then reports these payments to the credit bureaus. You can continue the subscription every 6 months, but you must have one of the KOHO Easy, KOHO Essential, or KOHO Extra account in order to access this tool.
Why providers decrease limits
Just like many Canadians, banks are also being forced to tighten their belts to protect themselves from a financial fallout. When the economy takes a hit, banks and other credit card providers start to worry that clients will take on more credit card debt and won’t be able to make payments. To mitigate the risk of credit card debt defaults, providers will sometimes decrease credit limits to force cardholders to curb spending. (In fact, many financial institutions decreased cardholder credit limits during the financial crisis of 2009.)
Furthermore, credit card issuers can lower your limit without your permission and without warning—though they do need to notify you of the change within 30 days of having made the amendment. If you’re wondering what your credit limit is, you can contact your credit card provider or it should also be printed on your monthly statements.
At other times (i.e. outside of an economic crisis) credit card issuers may reduce credit limits because a cardholder has not been making regular balance payments or because their credit score has decreased significantly. Even when the economy is stable, credit card providers regularly monitor accounts to ensure minimum payments are being made. Issuers will decrease a person’s credit limit if there is a risk the customer could default on their payments. So, just keep in mind that your credit limit is never guaranteed.
Get your finances in order
If a credit limit decrease is just one hit too many because you’re already struggling with credit card debt and a shaky credit score, it may be time to consider speaking to an expert about getting your finances in order. The Consolidated Credit Counselling Services of Canada has trained credit counsellors that can help you with debt consolidation and customize a debt management program that will put you on a path to true financial security.
Get help with your credit score with Consolidated Credit Counselling
