Don’t be surprised if banks start cutting credit limits in the coming months
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With the COVID-19 pandemic swiftly pulling the global economy into a tailspin, many are worried about how this will affect their own finances and credit. There have been a few reports of credit card issuers — specifically Chase — pulling back on credit limits already. We reached out to TPG staffers internally and TPG Lounge members on Facebook to see if they are actually seeing these cuts.
So far, the overwhelming response is that Chase (and other banks) haven’t gone through a massive credit-limit cutback. But that doesn’t mean it won’t happen in the coming months.
Why do issuers cut credit limits?
Long story short, it’s all about mitigating financial risk for the banks.
Credit card companies determine your credit limit based on a number of factors. The type of card you have, your income, your personal credit score and payment history, your current credit utilization ratio, internal issuer standards and more, all have an effect on the limit you are given — you can even request an adjustment if you feel your current one is too low or too high. When any of these factors change, an issuer may decide to cut back on the credit they extend to you.
Related reading: Here’s why you should never turn down a credit limit increase
But the state of the economy can also play a large role in issuers’ decisions to cut back on spending limits. When the economy is in decline (as it is now because of the coronavirus pandemic), issuers often lower credit limits across the board.
Related reading: How I slashed my own credit limit — reader mistake story
During a recession, which many experts fear is coming, people tend to borrow more money to pay bills or maintain their way of life when funds are low. Historically, this leads to a higher rate of delinquencies that credit card companies have to take on. The easiest way to reduce that risk is to reduce the amount of money people can borrow. This is a strategy we saw issuers take in 2008 during the Great Recession, and it’s likely we’ll see them implement this strategy as we move through the current economic crisis.
How credit limits affect credit scores
If you don’t ever spend anywhere near your credit limit on your cards, you may be wondering why this even matters. Well, your credit limit plays a significant part in how your credit score is determined. Both FICO and VantageScore credit score methodologies used by the big three credit agencies take your credit utilization ratio into account in some form or another when assigning scores. FICO assigns 30% of its overall score to amounts owed, and VantageScore lists the percentage of credit limit used as a “highly influential” factor.
Related reading: 8 biggest factors that impact your credit score
Your credit utilization is how much of your overall available credit is being used. To keep your score high, you want to keep that utilization ratio below 30%. But when an issuer cuts your credit limit, that ratio will rise. For example, let’s say you have $15,000 in credit available across three cards. You only have a balance of $4,000 out of that $15,000, which puts you at a 26.6% utilization ratio. But what happens if those three cards suddenly lower limits, leaving you with $9,000 in total credit available with that same $4,000 balance? Now, you are at a 44.4% utilization ratio, which could be damaging to your score.
Of course, if you’re paying off your bills in full each month, you have less to worry about. But you should still be mindful of the possibility of your credit limit changing.
How do I know if my credit limit has been decreased?
Issuers should send you a letter (and/or email) notifying you of the change. But you can also check your credit limit on your credit card online or through the app.
If you notice a decrease, there are a few things you can do. First, you can always request a credit increase. There is no guarantee that you’ll be granted one, but the longer your credit history of being a responsible borrower, the more likely they’ll allow you to have the increase.
You can also open another credit card to help add credit back into your utilization ratio (while earning a great sign-up bonus for a future vacation to boot). However, keep in mind that a hard pull from a new application might temporarily ding your credit score, too. Also keep in mind that many issuers have a threshold for how much credit you can take out across cards, so if you have primarily Chase-issued cards, now might be a good time to look at adding an Amex or Capital One card to your wallet.
We’re still early in this economic downturn. So, while we haven’t seen issuers start pulling back on credit limits to date, that doesn’t mean we won’t see it in the coming weeks and months. Keep an eye on your accounts (and your email/mailbox for notification letters from issuers) and make sure you’re paying down your balances each month to the best of your ability. That way, if your credit limits do get cut, your credit score will suffer minimal damage overall.
Featured image by Isabelle Raphael/The Points Guy
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