FAQ: Can a Credit Card Company Decrease Your Credit Limit Without Telling You?

The coronavirus pandemic has flipped millions of Americans’ financial lives upside down, seemingly overnight.

About 30 million Americans are newly unemployed. Many others have had their hours slashed, taken a pay cut or endured some other major reductions in income. As they scramble to make ends meet while waiting for their next paycheck or relief payment, many are forced to rely on credit cards.

But what happens if those cards are taken away?

That’s the troubling reality that many Americans face in coming months as banks manage their own risk in the wake of massive unemployment.

With that in mind, we compiled a list of frequently asked questions to help you know what to do in case your card issuer slashes your credit limit or even closes your credit card without notice — and what steps you can take in advance to reduce the chances that it happens to you.

Visit our Credit Cards and Coronavirus page to see more FAQs

Will the outbreak lead to people’s credit card accounts being closed involuntary or credit limits being slashed? Why?

Unfortunately, the short answer to the first question is, “yes.”

A new survey from CompareCards by Lending Tree shows that this is already happening across America.

In a survey conducted April 22-24, 1 in 4 credit cardholders said they had the credit limit reduced on at least one card or had a card closed altogether in the past 30 days. The survey data shows that there are nearly 50 million people who have less available credit than they did just a month ago.

Now, just to be clear, I am not saying that folks who ask for help from their issuers’ coronavirus-related hardship programs are going to have their credit limits slashed. By and large, I do not expect this to be the case.

However, banks faced with delinquency rates projected to increase and an unprecedented crisis with an uncertain end date are sure to want to minimize risk. One of the ways they can do that is to reduce credit limits on some borrowers’ cards or even closing cards. This happened a lot during the Great Recession a decade ago and it is happening today. Furthermore, this will likely continue to happen until COVID-19 and the economic crisis it caused finally subsides.

Why would banks do this? Simply put, unused credit limits equal potential risk, and banks are all about managing those risks.

Consider this: A person has three credit cards, each with a $5,000 limit. However, the person generally only carries a small balance on one of the cards and rarely or never uses the other two, holding them in case of emergency or for some big project, such as a home remodel. In a stable economy, banks are happy to extend that credit because they are confident that they will be repaid, especially if that person has good credit.

During uncertain economic times, the math changes for the bank. That unused credit suddenly looks like a liability. That is especially true when unemployment is high. A low-risk borrower can go from stable to struggling in a single day. That has happened to millions of Americans because of the coronavirus-related impact on the economy, and there is plenty more to come.

If my credit limit is slashed or my card is closed, do they have to tell me in advance?

For the most part, no. Your credit card issuer can generally raise or slash your credit limit — or even close your card altogether — without giving you notice.

That’s typically not the case with other major terms and conditions changes. The Credit CARD Act of 2009 requires issuers give at least 45 days’ notice of changes, such as interest rate and fee adjustments. That’s not the case when it comes to credit limits, though there is one key exception.

If an issuer reduces your credit limit lower than your balance on a card, they cannot charge you an over-the-limit fee until 45 days after the notice of the credit limit reduction. (Note: They cannot charge you an over-the-limit fee, period, until you opt in to accept those fees. However, once you have opted in, they must give you 45 days’ notice.)

The same rule applies to any penalty APR that would be implemented for exceeding the reduced credit limit.

In most cases, however, the credit card issuer could slash your credit limit tomorrow and wouldn’t have to tell you. Even if they close the card entirely, they generally don’t have to let you know in advance. That means that an awful lot of Americans could be in for a really unpleasant surprise the next time they try to use their card.

Can I reject the credit limit decrease?

Typically, the only way to avoid a credit limit decrease is to cancel the credit card, unfortunately.

Yes, you can call your issuer and ask them to reconsider. As my Dad likes to say, it never hurts to ask. However, in this case, I wouldn’t expect to get your way.

Also remember, if you do cancel the credit card in protest of the credit limit decrease, you still must pay your balance on the card.

If my card is closed or my credit limit is slashed, will it hurt my credit?

Probably, but you can take action to minimize the damage.

The root of the problem is your so-called credit utilization rate — or how much debt you have compared to your available credit.

Utilization is the second-most important factor in credit-scoring formulas after your payment history. It is also the factor most heavily impacted when you close a credit card. Here’s why:

• Say you owe $2,000 on a card and have a credit limit of $10,000. Your utilization is 20%. The typical rule of thumb is to keep the rate below 30%, so your rate would be considered strong.
• Say your limit is reduced to $5,000. That shoots your utilization up to 40% and would likely damage your credit score.

In the throes of a financial crisis, it can be difficult enough to keep your credit strong simply by paying your bills on time. Add in the extra trouble of having your limits slashed involuntarily by your issuer and things can get even messier.

There is good news, however. You can take action to minimize the damage.

• First, consider asking the issuer to reconsider. As mentioned, you’re not likely to be successful, but it is worth asking.
• If that fails, ask another issuer for a credit-limit bump on one of your other cards to make up for what you lost on the closed or slashed card. In a stable economy, banks are often willing to grant this request. We’ve also seen banks grant higher credit limits to those hit hard by the pandemic, so it is worth your time to ask.
• Lastly, consider getting another credit card to recoup some of that previously available credit. Obviously, you should only do this if you feel capable of managing another card. If you are, it can be a way to undo some of the damage that the limit reduction did to your utilization rate.

What can I do to limit the chances of my credit card being closed or my credit limit slashed?

Use the card more — but only if you can afford to.

Managing a financial crisis is about prioritizing. If your financial world has been thrown into chaos by the COVID-19 pandemic, you should not be spending extra money just to keep a little-used credit card open. Use every penny to keep the lights on and food on the table, and make at least the minimum payments on all the loans you haven’t been able to defer. The last thing you need to do is spend more money than is absolutely necessary.

However, if you can spare the expense for a recurring subscription, such as Spotify or Netflix, consider switching those payments to a card that you don’t use very much. Those $10 to $20 monthly payments keep your card active, while also being predictable and not adding new costs to your budget. You can then set up automatic payments, so the whole process is completely out of your hands.

There’s no guarantee that keeping a card active will save it from the chopping block. However, banks make more money off of cards that are being actively used — via fees and interest — than ones sitting dormant. If a card is generating revenue for a bank, they may be less likely to reduce that card’s buying power. Thus, if you can afford to use the card occasionally, it may make sense to do so.

You can minimize the damage to your credit

While the issuer’s decision to reduce your credit or close your card is largely out of your control, the good news is that you can take steps to minimize the damage if your card is affected.

However, remember that the onus is on you to make it happen. No one cares as much about your money and your credit as you do, and if you don’t take steps to get help, no one is going to come running to your aid.