Imagine being notified unexpectedly by your bank that your credit card limit has been lowered. You’re left wondering how this shift will affect your money and what caused it. However, banks don’t cut credit limits at random. This decision is made for specific reasons, such as modifications to the bank’s risk assessment or changes in your credit score. Let’s examine the reasons behind bank credit card limit reductions and your options.
Failure to make credit card payments on time
This concerning pattern points to a growing worry about rising credit card debt and borrower defaults. If you consistently miss credit card payments, your card issuer may consider you a high-risk borrower and lower your credit limit. Additionally, your payment patterns have an effect on your credit score. Your credit score can be raised by paying your credit card bills on time, but it can be considerably lowered by missing or making late payments.
Every month, you must pay off your credit card bill in full to prevent debt accumulation and credit score damage. Due to interest accruing on the outstanding balance, paying the minimum amount owed can result in a debt trap. By making the entire payment, you may keep your credit score high and stay out of trouble financially.
An increase in delinquencies at banks that issue cards
Banks are more exposed to risk as delinquencies rise. Banks are reevaluating their lending practices as a result of delinquencies, which indicate that an increasing proportion of cardholders are having difficulty repaying their obligations. Banks tighten their credit policies to reduce possible losses when delinquencies exceed acceptable criteria or when economic uncertainty threatens.
Therefore, unexpected actions, like lower credit limits or more stringent repayment terms, may be taken against cardholders who are thought to pose a greater credit risk. This is especially true for people who are at the lower end of the credit risk range, as they can be unprepared for these developments.
High ratio of credit use
One important indicator of the percentage of available credit being used is the credit utilization ratio. It is computed by taking the total amount spent and dividing it by the credit limit. For instance, your utilization ratio is 40% if you spend Rs 40,000 on a credit card with a Rs 1 lakh limit.
Responsible credit behavior is demonstrated by keeping the credit utilization ratio low, ideally under 30 percent. On the other hand, lenders may become concerned about high utilization ratios (over 70 percent). Because lenders consider borrowers with high use rates to be riskier, frequent high utilization can result in lower credit limits. Lenders may be reluctant to give favorable conditions or extend more credit if a high utilization percentage suggests an excessive reliance on credit and trouble managing debt.
A significant increase in the credit limit
Your total credit limit may rise dramatically if you accumulate a number of credit cards over time. However, banks may become concerned about your rapid growth and consider you to have a dangerous credit profile. Banks may lower your credit limit in order to lessen this danger.
Credit bureaus, which keep tabs on your credit history and total credit limit, provide banks with this data. For instance, some banks may think about lowering your credit card limit in order to reduce their risk exposure if you had 10 credit cards with a combined maximum of Rs 50 lakh at first, and then you quickly bought 10 additional cards, doubling your total amount to Rs 1 crore.
Uncertainty in the economy
Credit card companies frequently adopt a cautious stance by lowering their cardholders’ credit limits during difficult economic and financial times. Since cardholders are more likely to default on payments in these circumstances, this proactive strategy attempts to reduce prospective losses. During the COVID-19 epidemic, for instance, many credit cardholders had their credit limits lowered because to the economic downturn.
Card inactive
A lower credit limit may result from infrequent credit card use. Inactive accounts are less profitable for card issuers because they earn money from transaction fees and interest rates. Your bank may decide to transfer your credit limit to a more active cardholder if your card is inactive for a long time, which would increase the possibility that they would make money from fees and interest rates.
If your credit card limit is lowered, what should you do?
A lower credit limit may result from infrequent credit card use. Inactive accounts lower the profitability of card issuers, who profit from interest rates and transaction fees. Your bank may decide to move your credit limit to a more active cardholder if your card is inactive for an extended length of time, which would increase their chances of making money off of fees and interest rates.
