Your bank could lower your credit-card limit — what to do if that happens
If the spending limit on your credit card suddenly shrank, you’re not alone.
Some banks have started to decrease consumers’ credit limits as the job and income losses spurred by the global coronavirus pandemic has increased the possibility that people could miss their monthly payments.
the company that backs many credit cards offered by retailers, is taking a closer look at card holders’ ability to repay amid the virus outbreak.
“We’re continuing to utilize internal and credit bureau triggers to dynamically reevaluate the customer’s credit worthiness to manage credit exposure,” Brian Wenzel, Synchrony’s executive vice president and chief financial officer, said during an earnings call last week.
Other banks also said that they were evaluating borrowers’ credit limits at this time.
Banks typically reduce a customer’s credit limit to minimize risk, said Matt Schulz, chief credit analyst at LendingTree
“When the economy goes bad, all the calculus changes,” Schulz said. “Because people’s financial situations can literally change overnight, unused credit lines equal major risk.”
In other words, banks are worried about what could happen if someone makes a lot of purchases with their credit card, loses their job and misses payments because of their lack of income.
“Periodically, we review every account, and based on a variety of factors make the decision to adjust the spending limit,” a spokeswoman with Wells Fargo
said it bases a person’s credit limit on a real-time evaluation of their financial health.
“We want to accommodate their spending needs, while also helping to ensure they do not take on excessive levels of debt,” Ashley Tufts, American Express vice president of corporate affairs and communications, said in an email.
‘Banks are taking a balanced approach informed by economic data, which is consistent with legal and underwriting obligations to ensure credit lines match consumers’ ability to repay.’
— Jeff Sigmund, spokesman for the American Bankers Association
“While we are not pro-actively reducing more credit limits due to COVID-19, we will continue to take credit actions on accounts, if necessary,” she added.
American Express card holders who see their credit limits reduced can file an appeal to have their limit reinstated to its higher level, she said.
A spokesman for U.S. Bank
said the company will “continually monitor economic conditions as we work to maintain the integrity of our credit quality across all our products, which is a requirement of all banks.”
“In response to the coronavirus pandemic, many issuers are supporting their customers by offering flexible bill payments and by waiving late fees and interest,” said Jeff Sigmund, spokesman for the American Bankers Association. “Banks are taking a balanced approach informed by economic data.”
Why more banks could cut credit lines in the coming months
If history serves as a guide, card issuers could begin trimming credit lines in earnest soon. A 2008 survey of senior loan officers conducted by the Federal Reserve found that 20% of banks reduced credit limits on existing credit-card accounts to prime borrowers at the start of the Great Recession. For subprime borrowers, that figure soared to 60%.
When banks do cut credit lines, they don’t need to give people much warning either. “Most people don’t realize how much freedom credit-card issuers have to cut limits or even cancel cards without warning,” Ted Rossman, industry analyst at CreditCards.com.
For most changes made to a card, banks are required to give consumers at least 45 days of notice. That isn’t the case when it comes to changing the credit limit — unless the reduced credit limit will lead to a cardholder facing overdraft fees.
‘Most people don’t realize how much freedom credit card issuers have to cut limits or even cancel cards without warning.’
— Ted Rossman, industry analyst at CreditCards.com
Banks are also providing consumers with assistance during the pandemic. While some card issuers are cutting credit limits at this time, most credit-card companies are working with consumers who have been hard-hit by the economic downturn to manage their debts.
“If you’re someone who has been severely affected by the outbreak, you absolutely can get help from your issuer in terms of temporary rate reductions, limit increases and fee waivers,” Schulz said.
What to do if your credit limit is decreased — and how to prevent that from happening
Americans shouldn’t be afraid to negotiate with their credit-card company. “Ask your issuer to reconsider,” Schulz said. “Chances of success may not be high, but it is worth asking.”
People with multiple credit cards should make small purchases on all of them. Banks are likely to close dormant credit cards, and making even a small purchase will keep the credit card active. One way to do this easily is to move an automatic payment to cards you don’t use often for day-to-day spending.
‘If you’re someone who has been severely affected by the outbreak, you absolutely can get help from your issuer in terms of temporary rate reductions, limit increases and fee waivers.’
— Matt Schulz, chief credit analyst at LendingTree
Keeping your cards open will maintain a stronger credit-utilization ratio, which is one of the main factors that determines a person’s credit score, Rossman said. This ratio measures how much credit a person has used versus what is available to them.
If your limit is decreased on one card, you can ask a different lender to increase the limit on another card. You can also try applying for a new credit card, though those may be hard to come by right now.
If your credit line was decreased, you should also work to pay off your balance to give yourself more of a cushion.
Ultimately, consumers should be careful about treating their credit cards like lifelines right now given the current economic uncertainty.
“This underscores why it’s dangerous to use your credit card as your emergency fund, because that credit line could be pulled out from under you,” Rossman said.