“It was a Saturday evening when a man showed up on my doorstep with a bunch of letters in his hands to hand me in a letter in my name. The sender of the letter was my credit card company whose name appeared on the envelope. It made me a little bit worried because, in my knowledge, credit issuing companies do not announce good news this way.
When I ripped open the letter, I discovered that my credit card company lowered my credit limit from €10,000 to €8,000. It took me by surprise because as far as I knew they had no any particular reason to drop my credit limit. I had a good credit score. Even so, they did it,” John recalls in an interview with the Financial Advisor of MyCreditBucks.
There can be a couple of reasons why your credit card limit is reduced. Bear in mind that no credit card issuer is obligated to inform you, though they do in most cases, about the changes in your credit limit unless there is negative information on your credit report.
Your credit limit plays a paramount role in deciding your credit utilisation ratio. When the credit limit is reduced, say from €10,000 to €8,000, and you have a €4,000 balance on your credit card, the credit utilisation ratio will go down from 40% to 50%.
According to financial experts, on no account should your credit utilisation ratio be more than 30%. A higher ratio reflects your reliance on debts all the time. It will work against you because lenders will charge high interest rates. A high credit utilisation ratio will lower your credit score, an important factor in determining whether to approve the cheapest personal loan in Ireland.
In the case of John, the reason for reducing the credit limit was lowered because he had been using a fixed portion of the credit line. In order to improve the use of credit cards, the company decided to reduce the credit limit. What was surprising for John was that it all happened despite the fact that he had been their premium customer, and he never missed any payment. But then he realised that all these things do not matter. As long as the agreement allows, all financial institutions have the right to revise your credit limit.
However, this is not the only reason why credit card issuing companies decide to reduce your credit card limit. Other reasons include:
You might be worried about fees that your credit card issuing company will charge you over-the-limit fees. Well, your credit card provider cannot do it immediately. They are obligated to give you a buffer of at least 45 days from the day you receive a notice of reduced credit limit.
Financial experts suggest that the credit utilisation ratio must be 30% or below. A lower credit utilisation ratio is considered better, but do not forget that lenders will consider the overall credit scenario. Having a low utilisation ratio despite a significant use of the limit and having a low ratio because of very little use are two different things.
Only those credit card users benefit from having a low credit utilisation ratio who use the credit limit significantly. It shows that they make most of their purchases using their credit cards and yet manage to pay off the balance on time.
However, if your credit utilisation ratio is low as a result of not using your credit card, you will not be able to obtain any benefits from it. Your lender will not be so sure about your repaying capacity, and they will charge you high interest rates.
If you do not use the credit limit, your account can also be closed. Consequently, your credit score will go down. Once your credit score lowers, you will end up being charged with high interest rates down the loan.
Most of the people do bother about a reduced credit limit because they manage to maintain a low credit utilisation ratio through other cards with high limits. You can use other cards when you need a larger sum. However, this should raise alarm bells when you have only one card and you have a fear of maxing it out. The consequences will be dire when you have used up a high limit. Here is what you should do when your credit limit is lowered:
Your credit card provider will give you a notice, but they are not bound to do so. Sometimes, you are not up on a straight reason why your limit has been reduced. You should immediately talk to them and ask if there are any reasons to do so. Ask them if they can offer you the original credit limit.
If your credit card balance is the reason why you have a reduced credit limit, you should immediately make a strategy to pay off your balance. Your credit card provider will put you back on the original limit as you clear the balance.
You should try to open a new credit card. It will help you keep your credit utilisation ratio low. Your credit score will be checked. Opening a new credit card is a better idea only when your credit limit is reduced for a reason other than a poor credit rating or high credit card debt.
A credit card provider can reduce the credit limit at any time as long as the agreement allows for it. There can be a few reasons for them to do so, but make sure that is not the fault on your part.
