COVID + Credit: How Will a Lowered Credit Limit Affect My Credit Scores?
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Unemployment, furloughs and pay cuts caused by the Coronavirus/Covid-19 pandemic continue to affect consumers, many of whom are turning to their credit cards and lines of credit to help them pay for basic necessities. Unfortunately, some lenders and creditors are adapting their lending policies and lowering credit limits, leaving borrowers to wonder how those new credit limits will affect their credit scores.
Although some borrowers may be surprised by this action, especially if they have previously paid their bills on time, lenders and creditors can usually adjust credit limits at any time, for any reason, in an effort to mitigate their own risk. That’s why it’s important to understand how a credit limit decrease may impact your credit scores and what action to take if you believe you have been negatively affected.
What could a lowered credit limit mean for you and your credit scores?
The practice of lowering credit limits mostly applies to revolving credit accounts, which allow you to repeatedly borrow money against a defined limit and pay it back, with interest, over time (usually month to month). Examples include credit cards, home equity lines of credit (HELOCs) and personal lines of credit.
Your current credit limit is set by your lender or creditor and is generally related to your credit standing and income. Borrowers with an established history of repaying debts are generally offered higher credit limits than those who have little to no credit history or have had trouble keeping up with debts in the past. However, regardless of your current standing, your lender or creditor can change your credit limit anytime, unless the two of you have agreed to a different arrangement.
How can you anticipate that your credit limit may be lowered?
There is currently no definitive way to know if your lender plans to lower your credit limit. In fact, consumers often don’t know their credit limit has changed until they get an alert from their lender or creditor. This is why it's especially important to be aware of the possibility that your credit limit may decrease and know what those changes may mean for your score.
What is your credit utilization rate and why does it matter?
Your credit utilization rate, also known as your debt-to-credit ratio, represents your total debt divided by the total credit available to you across all of your revolving accounts. Your credit utilization rate is important because it is one of several factors lenders and creditors consider when they evaluate your request for credit. In general, lenders and creditors like to see a debt-to-credit ratio of 30 percent or below.
Here’s an example of how a credit utilization rate may be calculated: If you have two credit cards with a combined limit of $10,000, and you owe $2,000 on one card and $1,000 on the other for a total of $3,000, your debt-to-credit ratio is 30 percent.
However, if one of your lenders or creditors were to reduce your credit limit by $3,000 and cap your combined credit limit at $7,000, then your credit utilization rate would skyrocket to 42 percent in the previous example. Although your spending habits and total debt haven’t changed, this higher debt-to-credit ratio could still have a substantial impact on your credit score.
You can read more in-depth about your credit utilization rate and how it’s reflected in your credit scores here.
What options do I have to lower my credit utilization rate after the credit limit on my credit card or HELOC has been changed?
Unexpectedly having your credit limit lowered can be a jarring experience, but fortunately, there are steps you can take to minimize the impact on your credit standing.
- Reach out to your lender or creditor and ask them to reinstate your credit limit. Many borrowers these days are calling their lenders to request delayed or reduced payments. However, you may have more success by simply assuring your creditor or lender that you intend to continue making your payments — provided this is possible given your current state of employment — and explaining that an increased credit limit will help you mitigate the negative impact on your credit scores that comes with a higher debt-to-credit ratio.
- Rely on other available credit. If your initial request to reinstate your credit limit is refused, you may try calling another lender or creditor with whom you already have an open line of credit. They may be more willing to increase your credit limit if you explain your situation and the reason you’ve asked for the increased limit.
- Apply for a new line of credit elsewhere. If the above options fail, you may want to open a new line of credit with a lender or creditor with whom you have no previous relationship. Even if you don’t actively use this account, increasing your combined credit limit could have a positive impact on your debt-to-credit ratio. Be aware, however, that if you apply for a new line of credit and are turned down, the application will still generate the inquiry on your credit reports, which may impact your credit scores.
If your credit limit is lowered and none of the remedies above prove fruitful, try not to despair. As long as you continue to pay your bills on time, your credit scores will likely reflect your good borrowing habits. If you’ve recently experienced a job loss or other income reduction and are having trouble keeping up with your debts, reach out to your lender or creditor to discuss various repayment options — any sort of communication is better than none.