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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.

Check out what you can do if you’ve maxed out your credit cards.

Can my Bank Lower my Credit Card Limit Without my Notice?

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.

Why Would a Bank Reduce Your Credit Card Limit?

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: 

  • Lack of use: Also called low credit utilization, if you aren’t using a reasonable portion of your credit amount, then the bank may decide that you don’t need the full credit amount. For example, if your credit limit is $10,000 and you only use $500 or so a month, the bank may choose to reduce your credit limit.
  • Late payments: A little-known consequence of defaulting on your payment schedule is losing access to your full credit amount. Especially if you regularly make late payments on your account, the bank may decide to reduce the credit limit as a penalty.
  • Higher balance: Ironically, while low credit utilization can lead to a reduction in your credit limit, high credit utilization can have the same result. If you show a recent pattern of spending above your usual amount, then the bank may decide to clawback your limit to mitigate its risk. 

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. 

Check out how to increase your credit score without increasing your credit card debt.

  • Behaviour change: If the vast majority of your purchases are within your regional area, your credit card company may flag a transaction made outside of the province. This is more likely to result in a temporary hold being placed on your account, similar to what would happen if your credit card was used outside of the company. Other unusual transactions include international purchases, even when you do them online. 
  • Inactive card: Your credit company notices if you do not routinely use your credit card. If you don’t complete transactions with the card for an extended period of time, that credit line is deemed inactive. The bank can interpret this lack of use as a lack of need for the credit; and, therefore, reduce your credit limit. 

Check out if your credit card’s annual fee is worth paying

How Does a Credit Limit Decrease Affect Your Credit?

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

What Can You Do To Increase Your Credit Limit? 

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:

  • Contact the company: The first step is to call the institution that holds your credit account. This measure is particularly useful if the limit reduction was through no fault of your own. If you speak to the company, they can explain the reason for the decrease and you can work with them to restore it. The representative will be able to inform you of any necessary steps to return your limit to what it was before the reduction. 

Check out what credit score you need to get a credit card.

  • Monitor your credit report: The best way to manage your credit profile is by preventing any issues. Instead of waiting for an issue, keep tabs on your credit report. Be sure that you are using a reasonable amount of your credit account, and making your payments on time and in full. This alone can help you work towards a higher credit limit. 

Check out these credit building services in Canada.

  • Adjust your spending habits: By monitoring your credit account, you can track any potential issues before they happen. If you notice that you aren’t using a credit card, and thus risking it becoming inactive, change this by placing charges on the card. Conversely, if there is a credit card that frequently carries a balance close to the limit, you can take steps to reduce your spending. It’s all a matter of balance. Take measures to avoid spending either too much or too little.

Learn how to handle high-interest debt.

How do You Avoid Having Your Credit Card Limit Lowered?

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.

Credit Limit FAQs

Can a bank reduce my credit limit even if I’ve been a good client with a good credit score?

Though it is less common than a credit limit reduction resulting from defaults, a bank can reduce your limit even if you’ve been a quality client. Typically, this is a result of changes in behaviour, specifically your spending habits. Especially if you begin to use less of your credit, the bank may determine that you don’t need as much credit. 

Is it bad if my bank lowers my credit card limit?

It all depends on the reason for the credit limit reduction. If it’s a result of defaults on your payments or hyper utilization, then the situation warrants concern. Likely, the credit limit reduction will also lead to damage to your credit score. On the other hand, if the credit reduction is due to lack of use, then it should be fine. Keep in mind that, regardless of the reason behind it, the reduction will lead to a higher credit utilization ratio. Be sure to keep an eye on this metric since it factors into your overall credit score

Can a bank lower my credit card limit without my permission?

Though a bank is legally allowed to lower your credit card limit without your consent, they must send you a notice. So, while you will be informed of the reduction, the bank does not require your permission. 

Final Thoughts

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. 

Corrina Murdoch avatar on Loans Canada
Corrina Murdoch

Corrina Murdoch has been a dedicated freelance writer and editor for several years. With an academic background in the sciences and a penchant for mathematics, she seeks to provide readers with accurate, reliable information on important topics. Working as a print journalist for several years, Corrina expanded her reach into the digital sphere to help more people gain insight into the realm of finances. When she's not writing, you can find Corrina swimming and spending time with family.

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