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Why Your Credit Limit Might Be Lowered Due To Coronavirus

As economic conditions continue to be challenging because of the coronavirus pandemic, millions of Americans continue to struggle with maintaining their financial health. At the same time, lenders are growing more concerned about the increasing risk exposure of their customers not being able to pay their bills on time. So, lenders are taking actions to reduce that exposure.

Lowering of credit limits

One action being taken by card issuers is the lowering of credit limits on credit cards and even closing down credit cards with no activity—and not just on customers with really low credit scores. Has this happened to you? If so, you may be wondering about potential negative outcomes and what you can do about it.

When you apply for a credit card, the issuer determines the credit limit they'll assign based on your credit score, income and other factors. To be competitive, most card issuers assign higher credit limits—especially when the economy is healthy. When the economy enters a recessionary state, the risk of consumers using more of their available credit to stay afloat increases. Many issuers will take action to reduce the credit limits available to you as well as proactively close dormant accounts. It's all about lowering their risk exposure.

One possible outcome of this action is a decrease in your credit scores. One of the most predictive factors considered in the FICO® Scores is your revolving credit utilization ratio. This is a measure of how much of your available revolving credit is being used. The higher the ratio, the greater the risk, and more points lost in the score.

So how does the reduction of credit limits hurt a FICO® Score?

The following example helps explain the dynamics. Suppose Joe has the following three credit cards:

Credit Limit

Balance

Utilization Ratio

Discover $4,000 $2,000 50%
Mastercard $4,000 $3,000 75%
Visa $2,000 $0 0%
Total $10,000 $5,000 50%

Scenario 1: Joe's Discover and Mastercard credit limits are reduced by $1,000.

Credit Limit

Balance

Utilization Ratio

Discover $3,000 $2,000 67%
Mastercard $3,000 $3,000 100%
Visa $2,000 $0 0%
Total $8,000 $5,000 62.5%

Scenario 2: Now, Joe's Visa card is also closed

Credit Limit

Balance

Utilization Ratio

Discover $3,000 $2,000 67%
Mastercard $3,000 $3,000 100%
Visa $0 $0 0%
Total $6,000 $5,000 83%

Joe's total revolving utilization ratio increased from 30% to 62.5% when the credit limits on his Discover and Mastercard decreased by $1,000 and increased to 83% when his Visa card closed. Moving from a 30% revolving utilization ratio to an 83% ratio will likely have a substantial negative impact on his FICO Scores.
While card issuers are not obligated to warn you that they will be taking these actions, they are required to notify you when they have taken these actions.

What options do you have if your credit limit decreased?

  • You can contact the card issuer and request they reinstate your previous credit limit or give you some portion of that credit limit back. There is no guarantee they will say yes but asking doesn't hurt! However, they may pull a credit report on you as part of their evaluation process. That inquiry could negatively impact your future FICO® Scores—so be sure to ask about that process so you can make a more informed decision to proceed with the line increase request.

  • You could apply for a new credit card as a means to "get back" that credit limit. However, the issuer will pull a credit report on you as part of the application review. That inquiry may negatively impact your future FICO Scores. If approved, the new account will be reported to the credit bureaus, which will impact your length of credit history and potentially hurt your scores.

  • If you have inactive/rarely used credit cards in your wallet, it may be a good idea to use some of them periodically. You can make a small dollar transaction and then pay the bill in full. This will show recent activity on the card and could help prevent an issuer from closing it down due to inactivity.
    And, as always, reducing the balances owed on your credit cards can help reduce your revolving utilization ratio, which may help to increase your scores.

Tom Quinn

Tom Quinn is the Vice President of Business Development for myFICO and has over 25 years of experience working with consumers, regulators, and lenders regarding credit related questions and initiatives.