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Coronavirus: What it means if your lender cuts your credit card limit

When economic times get tough, banks often cut credit card limits to some customers to reduce their risk of costly defaults. If that happens to you, the impact could hurt your credit score.

During the 2008 financial crisis, banks lowered limits by a quarter to half, said Bill McCracken, president of Phoenix Synergistics, a market research firm for financial services companies. If the coronavirus crisis drags on, forcing businesses and much of public life to stay shut down, Americans may see similar reductions, he said.

More than 30 million Americans have lost their jobs from the economic fallout from the coronavirus pandemic. That will make banks jittery about their cardholders’ ability to pay back what they borrowed.

Here’s what you need to know.

Does it affect your credit score?

Yes. A smaller credit limit will likely affect your credit score negatively. This is because the reduction of your limit affects your utilization rate — or the amount of available credit that you use — the second-most important factor in credit scoring.

Credit experts recommend keeping your utilization rate below 30% for each card and in aggregate. (Photo: Getty Creative)
Credit experts recommend keeping your utilization rate below 30% for each card and in aggregate. (Photo: Getty Creative)

The lower your utilization rate, the better for your score. For instance, if you have a $2,000 limit on your credit card and hold a $500, then you’re using only 25% of your limit — your utilization rate. If your bank cuts the limit to $1,000, you now have a much higher utilization rate of 50%.

In general, credit experts recommend keeping your utilization rate below 30% for each card and in aggregate.

“If your credit limit is reduced significantly, it can have a major impact on your credit score,” said Matt Schulz, chief industry analyst at CompareCards. “It may end up making it harder for you to get that next credit card or that next loan.”

The impact on your credit score may not be as much as missing a payment, but even small changes may affect your ability to get a loan or credit card in an environment where banks are tightening their standards, Schulz said.

How to protect yourself from credit limit cut?

Banks will first target cardholders who haven’t used their credit cards very much. They will leave alone the customers who use their card more often, because banks can still make money off of fees or interest, according to Schulz.

To avoid getting your limit reduced you can start by using your credit card more often, keeping in mind that you shouldn’t spend more than you need to, but rather reorganize your current payments.

“Use that card a little more than in the past,” Schulz said. “If you can spread out payments that you were already going to make on a dormant card, it might help keep that card.”

One way to do that is to move a recurring subscription over to a card you don’t use often. You can also put a purchase that you were going to make with your primary card on another, less-frequently used card instead.

What if your credit limit is reduced?

If you’ve had your limit lowered the first thing you should do is to contact the issuer and see if you can get it restored, McCracken said.

The majority of consumers who call their credit card issuers when they're assessed late payment, had their limits decreased, or have had interest rates increased have a high chance of getting the issue resolved, he said.

The majority of consumers who call their credit card issuers when they're assessed late payment, had their limits decreased, or have had interest rates increased have a high chance of getting the issue resolved. (Photo: Getty Creative)
The majority of consumers who call their credit card issuers when they're assessed late payment, had their limits decreased, or have had interest rates increased have a high chance of getting the issue resolved. (Photo: Getty Creative)

“If you're just a regular person that is paying on time in general and is a responsible credit card user, you have a better than 50% chance of getting that credit limit restored,” he said.

Even if you don’t get it fully restored, you might get your limit increased at least some, McCracken said.

If your bank won’t increase the limit and you need that additional credit, applying for another card is an option. It might be difficult because some card issuers aren’t marketing as much to new customers, but you may still get approved if you find the right issuer.

“Find an issuer who is interested in starting to build new customers for when this economic dark period turns around,” McCracken said.

Denitsa is a reporter for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova.

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