Issuers are cutting credit limits, but here's what you can do about it

Editor's note: This post has been updated with new information.

The COVID-19 pandemic swiftly pulled the global economy into a tailspin, and many are still worried about how this current recession will affect their own finances and credit. A few months ago, we warned about the potential for issuers to start cutting credit limits. Reports of these cuts have now become more prevalent — specifically from Chase.

If you are one of the cardholders that had their credit limit drastically cut recently, not all hope is lost. Today, I'm walking through why issuers cut credit limits during economic downturns and what you can do about it.

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What to know about recent credit limit cuts

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 accounts with low utilization.

During a recession, like the one we are experiencing now, 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 (which costs them money). 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 we're now seeing banks implement this strategy as we move through the current economic crisis.

Related reading: How I slashed my own credit limit — reader mistake story

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.

Related reading: How to recession-proof your credit score

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.

Related reading: How to check your credit score for absolutely free

What to do if your credit limit is cut

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.

TPG Photography Manager Riley Arthur received a notice from Chase that the credit limit on one of her cards would be cut in half. She called Chase, and they immediately reversed the decision. The representative she spoke with on the phone said that there's a 30-day grace period from notification of the letter being sent for you to cancel the change. So at least with Chase, there is a good chance you can undo the cut if you call within that 30-day period.

If you're worried about the increase of your overall credit utilization ratio, you can also consider opening another credit card to help add more 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.

Related reading: Should you be applying for credit cards right now?

Bottom line

While issuers are pretty tight-lipped about the factors that they use to determine which accounts get credit cuts, we do know that unused credit card accounts are at the highest risk for getting a limit cut. Make sure you're using your cards regularly — especially the ones that you typically keep in the sock drawer. During recessions, card issuers also tend to start closing dormant accounts, and no-annual-fee cards that haven't been used in over a year are generally the first to go.

Related reading: Why you should use your rarely used cards — especially now

So far, it looks like Chase is being the most proactive about cutting credit limits. Almost all of the anecdotal data points we have are from Chase cardholders. If you do experience a cut, you should be able to call and get it reversed within that 30-day period. 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 irreversibly cut, your credit score will suffer minimal damage overall.