Why your credit limit could be lowered due to the coronavirus

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SAN JOSE, California, September 9, 2020 / PRNewswire / – As economic conditions remain tough due to the coronavirus pandemic, millions of Americans continue to struggle to maintain their financial health. At the same time, lenders are increasingly concerned about the growing exposure to the risk that their customers will not be able to pay their bills on time. So, lenders are taking steps to reduce this exposure. The following is an explanation of why credit limits may drop and how this may affect your FICO Score, from myFICO.

For more information on loans and credit visit the myFICO blog at https://www.myfico.com/credit-education/blog.

Lower credit limits

One of the measures taken by card issuers is to lower the credit limits on credit cards and even closing credit cards with no activity – and not just customers with very low credit scores. Has this happened to you? If so, you might be wondering what the potential negative results are and what you can do about them.

When you apply for a credit card, the issuer determines the credit limit it will give you based on your credit score, income, and other factors. To be competitive, most card issuers set higher credit limits, especially when the economy is healthy. When the economy enters a state of recession, the risk that consumers will use more of their available credit to stay afloat increases. Many issuers will take steps to reduce the credit limits available to you and proactively close dormant accounts. This is to reduce their exposure to risk.

One possible result of this action is a decrease in your credit scores. One of the most predictive factors taken into account in FICO® scores is your turnover credit utilization rate. This is a measure of how much of your available revolving credit is used. The higher the ratio, the greater the risk and the more points lost in the score.

So how does lowering credit limits hurt a FICO® Goal?

The following example helps explain the dynamics. Suppose Joe has the following three credit cards:


Credit limit

Balance

Use rate

To discover

$ 4000

$ 2,000

50%

MasterCard

$ 4000

$ 3,000

75%

Visa

$ 2,000

$ 0

0%

Total

$ 10,000

$ 5,000

50%

Scenario I: Joe’s Discover and Mastercard credit limits reduced by $ 1,000.


Credit limit

Balance

Use rate

To discover

$ 3,000

$ 2,000

66%

MasterCard

$ 3,000

$ 3,000

100%

Visa

$ 2,000

$ 0

0%

Total

$ 8,000

$ 5,000

62.5%

Scenario II: Now Joe’s Visa Card Is Also Closed


Credit limit

Balance

Use rate

To discover

$ 3,000

$ 2,000

66%

MasterCard

$ 3,000

$ 3,000

100%

Visa

$ 0

$ 0

0%

Total

$ 6,000

$ 5,000

83%

Joe’s total revolving usage rate fell from 30% to 62.5% when his Discover and Mastercard credit limits decreased by $ 1,000 and rose to 83% when his Visa card closed. Going from a renewable utilization ratio of 30% to a ratio of 83% will likely have a substantial negative impact on its FICO scores.

Although card issuers are not obligated to notify you that they will take these actions, they aree required to inform you when they have taken these measures.

What options do you have if your credit limit goes down?

  • You can contact the card issuer and ask them to reinstate your old credit limit or return part of that credit limit to you. There is no guarantee they will say yes, but asking doesn’t hurt! However, they may prepare a credit report on you as part of their assessment process. This request could negatively impact your future FICO® scores – so be sure to educate yourself about this process so that you can make a more informed decision to proceed with the line increase request.
  • You can apply for a new credit card to “recoup” this credit limit. However, the issuer will prepare a credit report on you as part of the review of the application. This survey may have a negative impact on your future FICO® scores. If approved, the new account will be reported to the credit bureaus, impacting the length of your credit history and potentially hurting your scores.
  • If you have inactive / infrequently used credit cards in your wallet, it may be a good idea to use some periodically. You can do a small dollar transaction and then pay the bill in full. This will show recent activity on the card and could help prevent an issuer from shutting it down due to inactivity.

And, as always, reducing your credit card balances owed can help lower your revolving usage rate, which can help boost your scores.

About myFICO

myFICO makes it easier to understand your credit with FICO® Scores, credit reports and alerts from the 3 bureaus. myFICO is the consumer division of FICO – get your FICO scores from the people who do the FICO scores. For more information visit https://www.myfico.com.

SOURCE myFICO

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