How Will a Lowered Credit Limit Affect My Credit Scores?

Highlights:

• Your lenders and creditors can lower your credit limit at any time for any reason.
• When your credit limit decreases, it can affect your debt-to-credit ratio.
• If you can pay your bills on time every month, a lowered credit limit doesn't have to be a bad thing.

Unemployment, furloughs, unexpected personal financial crises, and pay cuts affect consumers. During this time, many turn to their credit cards and lines of credit to help pay for the basics. Unfortunately, some lenders and creditors may choose this time to lower credit limits. This may make you wonder how those new credit limits will affect your credit scores.

This change may affect you, even if you have paid your bills on time. Lenders and creditors can adjust credit limits at any time, for any reason, to lower their own risk. That's why it's important to know how a credit limit decrease may impact your credit scores. You should also know what you can do if this change affects you.

Why did my credit limit decrease?

When you apply for a loan or line of credit, your credit limit is set by your lender or creditor. Your credit limit is usually related to your credit standing and income. Borrowers with a history of repaying debts are often offered higher credit limits. If you have little to no credit history or have low credit scores, you may have a lower credit limit. Regardless of this, your lender or creditor can change your credit limit anytime. But, if the two of you have a different agreement, they must tell you before they raise or lower your credit limit.

There is currently no definitive way to know if your lender plans to lower your credit limit. In fact, some may not know their credit limit changed until they get an alert from their lender or creditor. This is why it's important to know that your credit limit may decrease at any time. Plus, you need to know what those changes may mean for your credit scores.

How does a credit limit decrease affect credit scores?

The practice of lowering credit limits usually applies to revolving credit accounts. These accounts allow you to borrow money against a defined limit and pay it back, with interest, over time. These include credit cards and home equity lines of credit (HELOCs). If your credit limit goes down, here's what it can mean for your credit.

• Increased credit utilization ratio. Credit utilization is the amount of revolving credit you're using compared to the total amount of revolving credit available to you. This is a major factor when calculating your credit scores. If your lender or creditor lowers your credit limit, but your balance stays the same, this could rise.
• Credit utilization changes. Creditors and lenders like to see a credit utilization, also known as debt to credit ratio, of about 30%. Imagine you have two credit cards with a combined limit of $10,000. If you owe $2,000 on one card and $1,000 on the other, your debt-to-credit ratio is 30%. But, if your combined limit lowers to $7,000, your debt-to-credit ratio changes to 42%. If this happens, your credit scores will take a hit.
• Paying what you owe. Dealing with a lowered credit limit may seem scary, but it doesn't have to be. If you pay what you owe each month and stick to a 30% debt-to-income ratio, a credit limit change may not affect you. In fact, paying your bills on time in full could benefit your credit scores.

How can I lower my credit utilization rate after a credit limit decrease?

Having your credit limit decrease can be a jarring experience. But, there are steps you can take to reduce the impact on your credit scores.

1. Reach out to your lender or creditor and ask them to reinstate your credit limit. Many borrowers can call their lenders to request delayed or reduced payments. But, you can also call them to ask to have your old credit limit reinstated. Assure your creditor or lender that you intend to continue making your payments. Be sure to only say this if it is possible given your current situation. Explain that your old credit limit will reduce the impact of a higher debt-to-credit ratio.
2. Rely on other available credit. If your lender refuses to reinstate your credit limit, try calling your other lenders. They may be more willing to increase your credit limit if you explain your situation. Be sure to specify the reason you've asked for the increased limit.
3. Apply for a new line of credit elsewhere. If the above options fail, you may want to open a new line of credit. Try using a lender or creditor with whom you have no previous relationship. Even if you don't use it, this account can increase your total credit limit. This could improve your debt-to-credit ratio. Applying for a new line of credit will show as a hard inquiry, regardless if the credit application is approved or denied. This may impact your credit scores.

If your credit limit decreases and none of the options work, there is no need to worry. If you continue to pay your bills on time, your credit scores will reflect your good borrowing habits.

How can Equifax^® help me manage my credit scores?

If you are having trouble keeping up with your debts, reach out to your lender or creditor. Discuss various repayment options. Any sort of communication is better than none. If you worry that a lowered credit limit will impact your credit scores, Equifax is here for you. With Equifax Core Credit™, you can view your VantageScore^® credit score daily. This credit score is a VantageScore based on Equifax data. A VantageScore is one of many types of credit scores. If you want tailored ways to help improve your credit score, download the myEquifax™ App . Optimal Path™, which is in the myEquifax app, is a free tool that can help you find ways to improve and maintain your VantageScore.