Ask an expert: “Can the bank just reduce my credit limit?”
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Q. I have several credit cards, which I use for different purposes. However, even though I’ve never missed a payment and have great credit, my credit card provider contacted me out of the blue saying it would lower my credit limit. Can companies do this – and what can I do now?
Submitted via Which? Money Helpline.
As a customer with a solid repayment history, it can be shocking to see your credit limit reduced – but your provider is usually allowed to reduce your limit at any time under the terms of your agreement.
In truth, there are a number of reasons lenders decide to lower credit limits, and not all of them are within your control.
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Why would the bank lower your credit limit?
Generally, lenders will tend to reduce your credit limit to reduce ongoing risk.
In some cases, this may reflect your spending habits. So if you regularly miss payments, your supplier may decide to reduce their liability by reducing your available credit.
Likewise, if they receive information from a credit reference agency that your score has dropped, they may also decide to withdraw the amount of credit available to you.
But even customers with a clean payment history and good credit can be affected, as providers will analyze individual spending habits to examine how you’re using your limit. If you rarely use your card or aren’t nearing your limit, they may decide that a lower line of credit is more appropriate.
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Credit limits and responsible lending
Responsible lending is a key consideration for credit providers – and that includes managing their debt exposure. If you have a credit limit of £5,000, the provider must be able to lend you that amount and bear the risk that you don’t repay. Lowering a borrower’s limit reduces the amount of potential debt the bank has to bear.
In some cases, financial institutions will make a political decision to lower their credit limit for an entire group of customers, regardless of individual circumstances. This reduces the bank’s overall unused credit ratio – the gap between what borrowers have spent and what they have the potential to spend.
Credit providers are under increasing pressure to lend responsibly, with thefor customers in difficulty. In these circumstances, institutions may be particularly keen to show that they offer their customers appropriate credit limits.
How Low Credit Will Affect Your Credit Score
If you don’t regularly use your full credit limit and don’t plan to apply for a large loan, a lower credit limit may have little impact on you.
But if you have a balance on your card, a lower limit can increase your credit utilization rate (the amount of credit you use relative to your card limit).
Let’s say your balance is £500. If your limit is £2,000, your credit utilization rate is 25%. But if your limit drops to £1,200, your rate jumps to over 40%.
If you are applying for a loan (including a mortgage), the lender will review your current credit utilization rate. As a general rule, it is advisable to keep this ratio below 30%. A higher rate can hurt your credit score and reduce your chances of being approved.
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What if your limit is lowered?
Finding out that your credit limit has been reduced can be a nasty surprise. But you have a few options for what to do next.
1. Check for errors in your credit history or payments
If you think your background is solid, check your credit history for errors. If an error has been made, you can contact your credit score provider or the individual lender to try to have it rectified. Likewise, missed payments can be another explanation for the bank’s actions, so check that your bill payments are being made on time.
2. Contact the issuer to defend yourself
If you want your limit reinstated, you can call your credit card issuer to defend yourself. Maybe you’ve used your card less due to an extended vacation abroad or illness – or maybe you have a specific reason for wanting a higher credit limit. Although the bank is not required to change its decision, providing a history may help your case.
3. Pay off your balance
To prevent your credit score from being lowered, you should try to pay off any outstanding balance on the card. This will lower your credit utilization rate and improve your credit score.
4. Consider transferring the balance
If you need a higher limit and the bank refuses to budge, you can try opening a card with a new provider and transferring your balance.
5. Don’t immediately cancel the card
You might be tempted to close your account, but it can backfire. Having access to a range of credit options can improve your credit score, even with a lower balance – and canceling your card immediately after the limit is reduced can set off alarm bells for other lenders. Continue to use the card for small payments and pay the balance in full each month.