How Do Lowered Credit Limits Affect Your Credit Score?
Were you aware that credit card companies can reduce a credit balance at any time? Yes, Visa is allowed to unilaterally decide that you have access to a lesser amount of credit. You might not even know about it until you happen to check your credit statement. This can be a source of inconvenience while also lowering your credit score.
Lower Balance Means Less Available Credit
Having lowered credit limits will give you less available credit. The amount of credit that you have available to you is one of the six factors that are used to determine your credit score. For some credit card users, it means a lower credit score without doing anything wrong.
When Utilization Ratio Goes Up
Say a credit card user has a balance of $100 on a credit card with a $500 limit. The utilization ratio for that borrower would be 20 percent. This is a great number that can help to maintain a healthy credit score. What happens if you encounter lowered credit limits where the credit card company slashes that balance to $200? The borrower all of a sudden has a utilization ratio of 50 percent. This can drop a healthy credit score by as much as 100 points.
Why a High Percentage of Available Credit Matters
Why does it matter how much of your credit that you have used? This matters to you because a credit card holder who uses a high percentage of available credit may be having financial issues. Lenders are going to be wary of anyone who has to use so much available credit without paying it back. Experian explains that credit reporting bureaus interpret low credit utilization ratios as consumers being able to manage credit properly.
The credit bureaus don’t care about any reasons why your debt utilization ratio is so high. Credit agencies will simply issue a report based on the numbers that they have. This is why having your balance lowered through no fault of your own can be so hard to swallow.
Is There Anything You Can Do About Credit Limits
The only thing you can do to help yourself is to pay off your balance as fast as possible. Stop using the card once you have paid off the balance. Credit card companies that would cut your balance may not be creditors you want to do business with in the future. Another option you might want to try out is applying for more credit cards. Adding another credit balance could offset any other card having its balance slashed.
Check to make sure that you are submitting your monthly payment on time. It could very well be your own fault that your balance has been lowered.
Take a look at your credit report to make sure that you are not contributing to your balance being cut.
It can often times come as a surprise that your credit limit is being lowered. Some may see it as a good thing as it lowers the temptation to use a credit card. However, there are many negative ramifications of having your credit limit lowered. If this ever happens to you, look into other credit cards that will help you regain the available credit that you just lost.