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Credit cards are incredibly useful financial tools. When properly managed, they can improve your credit profile, give you access to online services, and provide emergency funds in a pinch. In order to get the full benefits of your credit card, it’s important to understand how to manage it properly. Irresponsible credit card use can lead to serious consequences ranging from account cancellation to credit limit reduction.
Picture this: your online shopping cart is full, you go to check out; and, for seemingly no reason, the transaction is declined. You look online and your credit limit has decreased substantially. Especially if you didn’t know it was possible, this can come as a complete shock. To mitigate this risk, the key is to understand why a credit company might reduce your limit — and take measures to prevent it.
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While your credit card provider must provide you with notice of the impending reduction, they do not require your consent. In fact, over the course of the pandemic and the economic cataclysm that ensued, many banks did precisely that. Though sometimes a credit reduction is the fault of the cardholder, in many cases it is the result of external circumstances. When unemployment rises, banks take measures to protect their assets, and one of the first steps is reducing credit limits.
Sometimes, you may not be on the hook for the credit reduction (for instance, if the bank is clawing back overall limits). In other situations, your limit reduction may have been caused by your actions as the cardholder. There are many situations that can cause the bank to reduce your credit limit, including:
For instance, if you have a $10,000 credit limit, usually spend $3,000 a month, and all of a sudden it increases to $7,000 per month, the bank can take this as a change in your circumstances. This can lead to a decrease in the funds you can access.
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Though it may seem harmless to incur a credit reduction on your account, especially if you don’t use the full balance, there are significant downsides. A lower credit limit means that, by using the amount you regularly do, you have a higher credit utilization ratio. This metric figures into your overall credit score. Thus, unless you reduce your expenses proportionately to the credit limit reduction, you will likely see a lower credit score on your credit profile.
After you receive the notice of credit limit reduction, there are still steps you can take to increase it. By acting quickly and prudently, you can prevent issues and take measures to retain your credit limit. Possible steps include:
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While sometimes there is nothing you can do to prevent the company from lowering your credit limit, such as issues relating to the greater economic picture, there are usually steps to take. Keep your main focus on balance. You don’t want an inactive or underutilized card. You also don’t want a hyper utilized card. Aim to keep your credit utilization in the range of 30 percent. This prevents the card from becoming inactive without compromising your credit utilization ratio.
While a sudden credit limit reduction can be alarming, there are ways to avoid potential negative impacts. By staying up to date with your credit profile, you can ensure that your credit report remains in good standing. In order to prevent credit limit decreases, aim to keep your utilization at roughly 30 percent. Always make your payments on time and aim to be consistent in your spending habits. Provided you act prudently and manage your credit cards responsibly, you can mitigate the risk of a credit limit decrease altogether.
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