When your credit card limit is reduced, it might lower your credit score for two reasons:
- Your balance-to-limit ratio is reduced.
- Your overall credit usage-to-available-credit ratio is reduced.
“Can They Do That?”
Creditors have the right to reduce your limit. This can happen with a credit card and with a Home Equity Line of Credit (HELOC).
Three Reasons Why Your Limit May Get Reduced
- When a creditor sees that you have several credit cards maxed out, they get nervous. They think you are using credit cards to live off of and are getting into financial trouble. So to minimize their risk (and possible loss), they will reduce your limit asap before you borrow even more.
- If you pay late on one card (or worse, on several cards), a different creditor will see that by monitoring your credit. They fear you will also pay them late and quickly lower your limit so that you can’t charge more.
- In the case of a HELOC, a downturn in the mortgage market can result in the lender lowering your line of credit, even if you have paid perfectly on time. This happened to a lot of homeowners in 2007-2009 who were taken by surprise. This is why you need to read your contract and understand all the terms.
The best remedy is prevention.
The way to keep your credit limit is to pay on time every month on all your accounts. Also, pay the entire balance due to show you can afford your charged purchases and that you are not living beyond your means. (This applies to credit cards.)
If you’ve read Build and Protect Your Credit Like the Pros, you know that charging more than 50 percent of your limit will hurt your score; and that maxing out your credit cards will severely dock points off your credit score.
Thank you for reading and I hope this tip helps you get top tier credit that speaks well for your name.