Creditors May Lower Your Credit Limit in Response to COVID-19

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DISCLAIMER: As the COVID-19 public health situation evolves, new regulations are being continually issued. This page/story/information may not include the most recent information.

By Courtney Nagle | Wednesday August 26th, 2020

As COVID-19 has continued to take a toll on the American economy, which remains in recession, many people have made changes to their personal finances in an effort to make ends meet. From budgeting, to saving as much as possible, to furiously pursuing unemployment and other benefits, this has looked different for everyone. But despite your best efforts to take control, some financial impacts remain largely outside of your control. As it turns out, one of those impacts may be damage to your credit score. As financial institutions tighten their practices, many are lowering credit limits, which could lead to a drop in credit scores. Here is what you need to know.

Why Your Credit Limit Matters

A credit limit is how much credit a financial institution is willing to extend to you on a given product. It is a maximum amount, and you cannot exceed it without permission or an increase. We are talking here about credit limits on individual credit cards, but you can also think of your total credit limit across all your credit accounts. Credit limits typically vary according to your income and other factors. If you’re curious how your credit limit compares to others, Experian has published some very interesting data about the average “total credit limit” by generation.

On the one hand, the concept behind credit limits is pretty simple. If you have a credit limit of $1,000 on a given credit card, and you have already spent $700 on that card this month, then guess what happens when you try to make a $500 purchase. You will be denied for trying to go over your $1,000 limit. But, there is actually much more to credit limits than meets the eye. A credit limit is an important part of how your credit utilization ratio is determined. Why does that matter? Well, thirty percent of your FICO credit score is made up of your “Amounts Owed.” Despite the title, the most important factor of “Amounts Owed” is how much credit you are using versus how much credit you have available. That is your utilization ratio, and in general a lower ratio is better.

Therefore, your credit limit is actually very important because it impacts the second-largest variable in your credit score. If your credit limit goes down even on just one of your credit cards, that means your utilization ratio will increase (all other factors being equal). While it may seem counterintuitive at first, you are rewarded for having a higher credit limit! Of course, a higher credit limit also means that you could potentially take on significant debt without as many obstacles standing in your way. In some ways, then, a high credit limit is risky (especially if you are someone who may be tempted to run up your balances). But the risk is often rewarded in credit scoring models.

What Creditors Are Doing

Banks and other creditors have not been immune from the impacts of COVID-19, and banks are preparing for a future that could be grim. Of course, no one knows the future of the American economy, but creditors in recent months have decided to limit some risks where they can. One way banks do this is by decreasing the amount of credit available to their customers. Sometimes, a creditor may do this to a customer it views as high-risk and unlikely to repay all the credit that is currently available to them. Other times, the creditor may actually think a given consumer is a good risk, but wants to lower the credit limit anyway, to reduce its overall outstanding credit.

It appears that this has been a widespread practice by creditors this year. In April, some major creditors began paring back credit limits for new and existing customers. High profile bank executives made public comments (included in the previously linked MarketWatch article) about how they would approach this strategy, including periodic reviews and real-time assessments of customers’ financial well-being. Since then, there has been a flurry of posts and chatter about this issue—from forums, to social media, to travel rewards websites—indicating that this has become fairly common.

Creditors generally have significant freedom to make this change without your consent. However, you should receive notice that the change has occurred.

Steps You Can Take

You should determine whether this issue is affecting you negatively. First, see if you have had your credit limits lowered. You should have gotten a notification about this, so re-check your mail, email, or online account to see. You may also have a credit monitoring service—either that you pay for or receive independently or through one of your cards. That service should alert you to a decrease in your credit limit. And, of course, if your limit affects your score, you can find out by checking your score and reading the alerts and explanations for why it dropped.

But should you even be worried about this? If you are already struggling with credit card debt, then the answer may be no. It is still true that a decrease in your limit can create a drop in your score, but that may not matter right now. Your more important goal may be to pay off your debt, and in some ways a lower limit may help you toward that goal. But for others, a hit to your credit score could be a major disruption, such as if you were about to purchase a home.

So, to recap: you should evaluate where you stand. Find out whether you had a drop in your limit, and consider if it is worth trying to fix. If the answer to both is yes, then your best bet is to contact your creditor directly. You should do so as soon as possible after the change is made, as your creditor may have a different process for considering a requested change to your credit limit if it is made long after a creditor-initiated change. You will want to explain to them that your credit score decreased but that you have not experienced a material change to your income or other financial circumstances. Ask directly that they return the limit to where it was previously. Just remember that they are under no obligation to grant your request.

Want More Help?

If you have experienced a decrease in your credit limit related to difficulty paying your credit card bills, a credit counselor may be able to help. Contact an NFCC-certified counselor to discuss your situation in a free review and learn about the options that may be available to you.


Michigan license number:   DM-0016282 Available to the public and licensed in Michigan.

Section 13(1)  When a licensee establishes a debt management plan for a debtor, the licensee may charge and receive an initial fee of $50.00

Section 13(2)  A licensee shall attempt to obtain consent to participate in a debt management plan from at least 51%, in number or dollar amount, of the debtor’s creditors within 90 days after establishing the debt management plan. If the required consent is not actually received by the licensee, the licensee shall provide notice to the debtor of the lack of required consent and the debtor may, at its option, close the account. If the debtor decides to close the account, any unexpended funds shall be returned to the debtor or disbursed as directed by the debtor.

Sec. 14. (1) A contract between a licensee and debtor shall include all of the following:

(a) Each creditor to which payments will be made and the amount owed each creditor. A licensee may rely on records of the debtor and other information available to it to determine the amount owed to a creditor.

(b) The total amount of the licensee’s charges.

(c) The beginning and termination dates of the contract.

(d) The principal amount and approximate interest charges of the debtor’s obligations to be paid under the debt management plan.

(e) The name and address of the licensee and of the debtor.

(f) Any other provisions or disclosures that the director determines are necessary for the protection of the debtor and the proper conduct of business by a licensee.

Sec. 18. (1) In addition to the fee described in section 13(1), a licensee may charge a reasonable fee for providing debt management services under a debt management plan. The fee under this subsection shall not exceed 15% of the amount of the debt to be liquidated during the express term of the plan.

(2) A licensee may offer a debtor the option to purchase credit reports or educational materials and products, and charge a fee to the debtor if the debtor elects to purchase any of those items from the licensee.  Fees charged under this subsection are not subject to the 15% limitation on fees described in subsection (1).

(3) Except for a cancellation described in subsection (4), in the event of cancellation of or default in the performance of the contract by the debtor before its successful completion, a licensee may collect $25.00 in addition to any fees and charges of the licensee previously received by the licensee. This $25.00 fee is not subject to the 15% limitation on fees and charges under subsection (1).

(4) A contract is in effect when it is signed by the licensee and the debtor and the debtor has made a payment of any amount to the licensee. The debtor has the right to cancel the contract until 12 midnight of the third business day after the first day the contract is in effect by delivering written notice of cancellation to the licensee. A cancellation described in this section is not subject to, and a licensee shall not collect, the fee described in subsection (3).

(5) If a debtor fails to make a payment of any amount to a licensee within 60 days after the date a payment is due under a contract, the licensee may, in its discretion, cancel the debt management contract if it determines that the plan is no longer suitable for the debtor, the debtor fails to affirmatively communicate to the licensee the debtor’s desire to continue the plan, or the creditors of the debtor refuse to continue accepting payments under the plan.

(6) A licensee shall not contract for, receive, or charge a debtor an amount greater than authorized by this act. A person that violates this subsection, except as the result of an inadvertent clerical or computer error, shall return to the debtor the amount of the payments received from or on behalf of the debtor and not distributed to creditors, and, as a penalty, an amount equal to the amount overcharged.

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