When a lender lowers your credit limit
Having credit accounts and owing money on them is normal for millions of consumers. About 30 percent of a typical person's FICO® score is based on the outstanding debt shown on the person's credit report. Read more.
But when a high percentage of your available credit has already been spent, it can suggest that you are overextended financially and are more likely to make some payments late or not at all. Part of the science of scoring is determining how much is too much for a given credit profile.
This is especially true for credit cards. Lenders set your spending limit when a credit card account is first opened. Your lender can later change your credit limit up or down as permitted by your credit agreement. When such a change is reported to the credit bureau, it can affect your FICO score.
The news media has reported that U.S. lenders have recently stepped up their efforts to control their risk. One traditional approach is to reduce the credit limit of a person who is showing signs of greater repayment risk. Such signs or "risk triggers" on credit reports include late payments, collections accounts, and public records such as bankruptcies. If such an item appears in your credit report, it will likely cause a drop in your FICO score.
We recently studied this subject and found that credit limits have been lowered or inactive card accounts have been closed for roughly one in five American consumers.
Significantly, we found that one-fourth of these consumers had recent risk triggers added to their credit reports that may have prompted the lender's action. We found no such visible triggers on the credit reports of the other three-fourths of this group. Perhaps lenders were reacting instead to other kinds of risk triggers not on your credit report, such as:
- Exceeding your credit card limit
*Excessive cash advances on credit cards
*Problems handling other types of credit, such as bouncing checks
It's also possible that lenders reduced credit card limits for other reasons. For example, the lender may have wanted to free up financial capital for use in other credit products. Or to meet regulatory requirements.
By managing your credit responsibly, you can help to protect your FICO score from unexpected actions by your lenders.
