Photo by Anwaar Ali via Unsplash

Simply put, a credit limit is the maximum amount you can spend on a credit card. When you make a purchase, that amount is deducted from your credit limit and the remainder is the current amount of credit you have access to. When you make a payment, and once that payment is credited to your account, you have access to more funds – your credit limit minus your new balance.

You can usually find your credit limit on any statement you receive from your credit card company, or by logging into your account online.

Credit Limits and Covid-19

If you’ve recently noticed a change in the available credit on your credit card, there might be an easy explanation. While the unemployment rate hits new highs and more people have trouble paying bills due to coronavirus, some banks are seeking ways to offload their own financial risk. By lowering credit limits they can lessen the chance of consumers charging amounts they can’t afford to pay back.  

While not all credit card issuers are making these changes, some have reported performing regular evaluations of the creditworthiness of their customers. This can help them determine who may be experiencing a change in their financial situation that might make it difficult to keep up with payments.

How is a Credit Limit Determined?

The credit limit offered to you may seem like an arbitrary number, but there are plenty of factors at work behind the scenes. Here are some things that may come into play:

  • Credit score
    Your credit score is generally a good indicator of how well you’ve managed credit. Chances are, the higher your score, the higher the credit limit you’ll be offered.
  • Credit history
    Do you consistently pay your bills — particularly your credit card bills — on time? Do you consistently reach, or come close to reaching, your current credit limits? While your entire credit history matters, special consideration is given to how you have managed credit cards in the past.
  • Income
    You may be excellent at managing your credit, but your income is also important. After all, the amount of credit extended to you should reflect the amount of credit you are realistically able to pay back.
  • Debt-to-income (DTI) ratio
    The size of your other debt obligations can directly impact how much new credit a lender feels comfortable extending. You can calculate your DTI by adding up all of your monthly debt obligations (car payment, mortgage, etc.) and dividing that by your gross monthly income. While there’s no hard rule, the general consensus is that a DTI less than 36% is healthy.
  • Card type
    Some types of credit cards may come with a set credit limit extended to every borrower that is approved.

Changing Credit Limits: How It Works

Here’s the thing: Your credit limit is generally never set in stone. A credit card issuer may offer to increase your credit limit if you’ve increased your income and/or if you’ve proven to be a responsible borrower. On the other hand, they may decrease your credit limit for a variety of reasons, without notifying you beforehand. These reasons can include: 

  • Late or missed payments
    If you begin to make late payments or miss a payment entirely, a credit card issuer could see you as a high-risk borrower. If they lower your credit limit, they lessen their own risk.
  • High credit utilization
    Credit utilization — the amount of credit you use divided by the amount you have available to you — can be an indicator of your current financial health. If you begin to carry a high balance on your card, the issuer may decide you’re at a higher risk of defaulting.
  • Low or no credit utilization
    Credit card companies make their profits from charging you to use their product. If you never, or hardly ever, use your credit card, they could decide to lower your credit limit or close the account altogether.

The Impact on Your Credit Score

Unfortunately, if your credit limit is lowered, there could be a negative impact to your credit score. This is because, with less available credit, your credit utilization will likely be higher. (Remember, this is the amount you’ve collectively spent on all of your credit accounts at a given point in time divided by the total of all of your credit account limits.) However, you can counteract this by keeping your utilization below 30%

Credit utilization makes up 30% of your FICO credit score and is considered “extremely influential” in calculating your VantageScore. (There are many different credit scoring models, but these are often the most talked about.)

Potential Next Steps 

While a credit card company is not obligated to restore your original credit limit, there are a few steps you can take should this happen to you. 

Check your credit report.
Now through April 2021, you can request a free credit report from each of the three Credit Reporting Agencies (CRAs) — Equifax, Experian, and TransUnion — at AnnualCreditReport.com. Read through each report (the information can vary between reports so it’s important to check all three) and make sure there isn’t an error in reporting that raised a red flag to the credit card company. 

[Did you spot an error? Find out how Upturn can help you dispute it for FREE.]

Get clarification.
It never hurts to make a call to the customer service department to ask about the reason for the credit limit decrease.  

Ask for your limit to be reinstated.
Again, there are no guarantees, but the company may work with you, even if that means requesting you reapply for a higher limit.

Ask for a credit limit increase on another credit card.
If one credit card issuer has lowered your credit limit, you can potentially maintain your current credit utilization — and protect your credit score — by asking for a credit limit increase on another credit card. 

Above all else, however, the key should be to maintain or implement positive credit habits. Pay down balances to the best of your current financial ability, and make sure to proactively seek assistance from your creditors should you be unable to pay. 

[Find out how to get financial help during the coronavirus pandemic and discover the banks that are lending a hand.]