Prevent your credit limit from being lowered and what to do if it’s been cut

In response to the current state of the U.S. economy as a result of the coronavirus, credit card issuers have been cutting credit limits for some cardholders. Your credit limit not only affects your credit score but also how much you’re able to spend on your card at a given time.

If you’re worried about your limit being slashed, there are a few preventative measures you can take, including what to do if your limit has already been reduced.

How issuers determine your credit limit

In most cases, credit card issuers set your credit limit based on your income and information within your credit report, such as payment history and credit score, but there are a variety of ways your limit can be determined. In other words, the exact formula used is up to the institution at hand.

For example, if you’ve held an account with a certain bank for a number of years, exhibited a pattern of responsible financial behavior and decided to open a credit card with them, the bank is likely to take this into account — along with standard credit limit calculation factors — and offer you a higher limit.

It’s important to note, though, even without a pandemic, credit limits are subject to change.

Why issuers lower credit limits

For issuers, credit limits come with a level of risk. When an issuer doles out a credit limit, they’re trusting that you’ll spend within your limit and be able to pay off whatever purchases you’ve made.

In the context of COVID-19, the U.S.’s increasing unemployment rate and cardholders’ need for assistance, such as deferred bill payments and interest, is causing issuers to scale back that risk, in some cases, by lowering credit limits.

“What’s especially notable is how quickly the jobs picture changed (from the lowest unemployment rate in 50 years in February to the highest in 90 years in April),” says Ted Rossman, industry analyst at Bankrate. “Issuers need to recalibrate risk given that big shift.”

Steps to prevent a lower credit limit

Your credit utilization ratio, which is tied to your credit limit, is one of the most important factors of your credit score.

This ratio, which makes up 30% of your score, is equal to the portion of credit you’re using compared to your overall credit limit. When your credit limit is cut, it raises your credit utilization ratio — or the amount of credit you’re using — and has the potential to lower your credit score.

Unfortunately, it’s not guaranteed that your credit limit won’t be cut in the current climate, but the following tips can help boost your chances of keeping your limit intact.

Make a few purchases with your card each month

“You’re especially likely to get a limit cut if you’re not using the card (so it’s not making the company any money but it represents a liability),” Rossman says.

By charging a handful of purchases to your card each billing cycle, it signals to your issuer that the card is actively in use. This is especially important if your card has been inactive for some time — maybe its rewards structure isn’t relevant to your lifestyle anymore or you simply have other cards you’d rather use. While there’s no guarantee that swiping your card after months of dormancy can help, you’re better safe than sorry.

Practice responsible card usage

One of the most proactive things you can do is to use your credit cards as responsibly as you can. This includes paying your bills on time and in full each month and spending well below your credit limit (30% or lower is key but as low as 10% is ideal).

If you can’t afford to make your card’s payment one month, reaching out to your issuer for assistance will at the very least notify them of your situation and can help get you more time to make the payment sans interest or reporting to credit bureaus.

What to do if your credit limit gets cut

If you’ve already experienced a cut to your limit, consider the following tips to help preserve your credit score.

■ Reach out to your issuer

Whatever your circumstance may be, it doesn’t hurt to contact your issuer. Though unlikely, an unforeseen issue — such as an error on your credit report — could’ve led to the cut. By explaining your situation to your issuer either online or by phone, it’s more likely that you’ll receive a positive outcome.

■ Have credit card debt? Work to reduce it Credit card debt is one way that issuers pinpoint imprudent or risky cardholders, which may have led to your credit limit reduction. To preserve your credit score, prioritize paying off credit card debt (and be sure to keep the card open after the fact). In doing so, you’ll lower your credit utilization ratio and potentially boost your credit score.

■ Consider opening a new credit card Though this may not be the best option for everyone (i.e., if you already have credit card debt or a history of careless credit card usage), opening another credit card adds an additional line of credit to your profile and lowers your credit utilization ratio. In other words, by applying and getting approved for another card, you can potentially reverse any harm done to your credit score from your credit limit decrease.