Your credit history could be sparkling clean, but that doesn’t mean your credit score is completely safe.
One way your credit score can take a hit no matter how carefully you monitor your balances and due dates is if your card issuer decides to lower your credit limit. A lowered credit limit often has to do with negative behavior on your part, but sometimes the cause is completely out of your hands. It’s an unfortunate consequence of something over which you don’t have much control, but there are ways you can mitigate the damage to your credit score.
Decreased credit limits have become more common in the past two years because of the nationwide credit crisis. There are numerous reasons you could see your credit limit drop, and not much you can do about it in some cases. Obviously, you’ll have less purchasing power with a lower credit limit. But one of the less obvious negatives of a lower credit limit is the potential for a lower credit score.
If your line of credit is reduced, you will, at least temporarily, be using a greater percentage of your credit limit — and you might end up owing more. Because your credit score is partially based on what portion of your available credit you use, carrying a big balance-to-limit ratio could damage your score. That lower score can do some serious damage to your financial life by making it tougher to obtain loans, including auto, home or additional lines of credit.
What to do With a Reduced Limit
The first and biggest step to take if you discover your credit limit has taken a hit is to devote a lot of energy to making sure you don’t owe creditors much. If you align the amount you owe with your less flexible spending limit, your credit score probably won’t suffer.
If you are having a hard time getting your payments in on time or organizing your various credit accounts, speaking with a credit counselor is never a bad idea. The Federal Deposit Insurance Corporation (FDIC) suggests visiting the National Foundation for Credit Counseling at NFCC.org.
Reasons For Lower Credit Limits
There are a few reasons your card company might slash your credit limit. Some are based on things you can control while others could be out of your hands.
• Cutting it close on current limits — If you’re consistently maxing out your lines of credit, don’t be surprised if your credit card issuer takes action.
• Defaulting on other payments — When you default a credit card account with any institution, your other credit card issuers could take notice.
• Identity theft — If your identity is stolen, your credit could end up in shambles, depending what the thief does with your information and how quickly the problem is resolved.
• Credit bureau error — Not every credit-reporting agency is perfect. It’s a good idea to check up on your reports yearly to make sure none of your information is egregiously out of place.