How a Reduced Credit Limit Affects You

If you have a credit card, then you’ve likely heard stories of credit issuers drastically reducing credit limits and wreaking havoc on credit scores. So far, I had been spared, until today when I received the dreaded letter. My case wasn’t as severe as most, but I still called the bank to see if I could get it raised. Here’s what happened.

The Background

First, the background. I’ve had this card since the mid-90s and have carried debt on it twice. As a result of my credit history, I had a ridiculously high credit limit. This, plus other factors, resulted in a very high credit score, which qualified me for an excellent mortgage interest rate.

The Reduced Credit Limit

Today I received a letter that my limit had been cut in half. Half! It’s still high, especially given that I charge maybe $200 a year on the card, but that’s a pretty drastic cut. My first thought went to my credit score. Would it get dinged for this? How would that affect my loan approvals? I’ve read about people having their limits reduced and seeing their scores whacked by 20 points or more.

Bank Conversation

I called the number indicated in the letter to see what I could do. I explained that I’m shopping for a mortgage and was worried about my score. She advised me that you’re supposed to cancel credit lines to qualify for a mortgage. I had to explain to her how the current FICO scoring model works.

She checked my scores and credit history and explained that the bank is reducing limits because many customers weren’t using all the credit they’d been issued. Of course, I know it’s really because they’re terrified everyone will run up balances and default.

She couldn’t increase my limit. She did, however, offer to deposit money into my checking account right now, at 0% interest until February, to help with the down payment on the house. If they’re reducing my limit to reduce risk, why are they offering me an instant loan over the phone? She also helpfully pointed out that my purchase APR is now 1.99%. Again, encouraging me to carry debt on the card, even while they’re trying to reduce risk.

I asked to be transferred to the credit department.

Credit Department Conversation 

The credit department answered my call within 30 seconds or so. I actually have never had problems with their customer service, which I realize is rare. I explained to her that I’m pre-approved for a mortgage contingent on my high credit scores and am very worried that this credit limit reduction will hurt then. She reviewed my scores, history, and limit and assured me that my scores won’t be hurt. (Although my highest balance ever is nearly 50% of the new limit, which exceeds the recommendations. She didn’t mention that as a potential issue.)

She also couldn’t raise my limit and said she’s been fielding calls about this for 2-3 months, all with the same concern.

I suppose I was lucky – some people have had their accounts cancelled. I don’t expect that would happen with this account because they have some of my other accounts and probably fear losing me as a customer. It does tell me that I need to make sure I keep all my credit cards active.

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