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3 things to keep in mind if your credit limit was recently cut

Credit card issuers are tightening borrow amounts. Here's what to do if your credit limit gets cut.

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Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.

Nearly 40 million Americans have lost their jobs in the last nine weeks as the coronavirus pandemic has upended the economy, and financial institutions have already seen a major increase in deferment requests, delayed payments and forbearance applications.

In an effort to reduce risk, major card issuers including Capital One and Discover have announced that they will be limiting how much credit they lend to cardmembers.

"Actions we have taken since the crisis began includes significant tightening of underwriting for new card and personal loan accounts with additional employment verification, and we've pulled back on balance transfer offers and line increases," Discover CEO Roger Hochschild stated in an April 23 earnings call.

Capital One CEO Richard Fairbank shared similar plans to limit credit offers in a first-quarter earnings call.

Meanwhile, existing cardmembers across numerous issuers may see their existing credit limits cut, especially if they have not used their card in a while. Below, CNBC Select spoke with Leslie H. Tayne, a debt-relief attorney and founder of Tayne Law Group, about three things you should know if your credit limit was recently cut.

1. Card issuers can change your credit limit without notice

There are a number of protections in place to ensure that your card issuer does not unfairly increase your APR or charge fees without adequate notice. However, your card issuer can change some terms without telling you first, and that includes your credit limit. 

"Lenders aren't required to notify cardholders regarding credit limit decreases unless the reason for the decrease was based on adverse information on a credit report," Tayne tells CNBC Select

According to the Fair Credit Reporting Act, the only reason a card issuer needs to inform you about a credit limit decrease is because you missed a payment, are only making minimum payments on a high balance or took some other negative action that raised a red flag. In that case, your issuer would have to call or send written notice by mail or via the secure online message center.

2. Your limit is more likely to be lowered if your card is inactive

"Card issuers are closing cards and slashing credit limits on inactive cards to further prevent risk when lending," says Tayne. This even goes for customers with good credit.

"Tighter underwriting on applications means that lenders are looking to minimize the amount of risk faced when lending money," says Tayne. So while card companies look with more scrutiny at high credit utilization rates and missed payments, they are also more likely to reduce your access to their credit if you're not already demonstrating that you can borrow and pay off large amounts with regularity. If you currently have an unused line of credit, your card issuer might decide that it's easier to reduce your limit now before you could theoretically max it out in the future. 

"American Express has also implemented a new policy limiting cardholders to four consumer or business lending cards and ten charge cards, so consumers who are currently at this limit or over it won't get approved for another card from Amex," says Tayne.

3. You can ask your creditor to reconsider

Credit limit decreases are not the end of the world, but they can cause your credit utilization rate to increase. This is "incredibly important," says Tayne. Credit utilization makes up about 30% of your credit score, and if you plan on applying for a mortgage or other kind of loan in the near future, a spike in utilization can look like a red flag.

Consider this example: If a consumer had a $100 balance with a $1,000 credit limit, their credit utilization would be at 10%. But if their card issuer decreased the credit limit to $500, that same $100 balance would cause utilization to jump up to 20%.

"This could cause a domino effect — a higher utilization would lead to a lower credit score, which other lenders could perceive as an increase in risk and lower the limit of other cards that the person has," Tayne explains.

And less available credit means less spending power, which is not great if you had planned on making a large purchase or need to rely on your card to cover basic expenses during this difficult time. When your credit line is slashed, you're a lot more likely to go over your maximum credit limit.

Therefore, you should call your credit issuer and ask for them to reconsider, argues Tayne.

"A good first move is to contact the creditor to see if the old limit can be restored," she advises. "Ask for an explanation on the credit limit decrease." Borrowers can also write a letter of goodwill to the creditor explaining their hardship and situation.

Bottom line

"Consumers should be most concerned about future loan and credit approval, especially during this time where income can be uncertain and when a person or family may need an emergency loan," Tayne says. 

If your credit limit was recently cut, you could try opening another card, she says. "But you may find that you are turned down as it's harder to get approved right now."

The Capital One® QuicksilverOne® Cash Rewards Credit Card is on CNBC Select's list of best credit cards for fair or average credit. With a low annual fee of $39, cardmembers can earn 1.5% cash back on all purchases, redeemable at any time and for any amount.

If your credit score is good or excellent, you could choose a card that offers bonus rewards on grocery purchases, such as the Amazon Prime Rewards Visa Signature Card. You can earn an unlimited 5% cash back on Whole Foods and Amazon purchases, plus 2% cash back at drug stores, gas stations and restaurants.

However, you should weigh the pros and cons of a new credit card and consider the short-term impact on your score. Adding a new card to your wallet will definitely increase your total available credit and likely improve your credit utilization rate. But the new credit inquiry and reduction of your average age of accounts could cause your credit score to dip temporarily, explains Tayne.

Your safest bet might be to do nothing beyond the basics for a little while: "It's best now to try to pay more than the minimum, keep spending down on credit, and work to try to keep your credit good, including making sure payments are on time and not requesting assistance if you don't need it from creditors."

Information about the Capital One® QuicksilverOne® Cash Rewards Credit Card and Amazon Prime Rewards Visa Signature Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.