Why do banks increase or decrease your credit limit?

You may have noticed that your credit card limit is decreasing a little each month, or have been told by your bank that they will start adjusting your credit limit monthly by a certain amount. Perhaps you’ve been notified that you qualify for a credit limit increase. But what does all this mean?

Your credit limit is the cap on what you can spend on what is called ‘revolving credit’, which includes credit cards. Your credit card limit may be decreased or increased for various reasons – including mitigating risk for the bank, or helping you get rid of debt. Sometimes, a credit limit adjustment is a good sign, but it could also be a warning that you’re not managing your credit as well as you should. Here’s what you need to know:

Why would your credit limit go down?

Your credit limit is linked to your credit record, so any changes to your credit limit are related to your credit score and the bank’s experience with you as a borrower. If you’re spending more than you pay back or make payments only to use all your available credit again immediately afterwards, it shows that you may not be able to afford to pay off the total amount loaned.

If you’re offered a credit increase, it means that your credit is currently in good standing

To manage this in a way that reduces the credit provider’s risk while encouraging you to manage your debt better, your bank or credit provider will implement limit decreases. These won’t be super-high, but they will affect the amount you pay back. If you’re paying the minimum required amount every month, it'll mean that you have less credit available after making a payment than you used to.

Another reason your limit might be adjusted is if your bank reviews your credit reports, and your score has been lowered because you missed other debt payments.

What to do if your credit limit is decreased

Once you understand why your limit has been decreased you can start to amend it:

  • Missed or late payments If you miss or pay your credit card later than the agreed-on date, it could affect whether your limit is adjusted. Make sure that you make your payments diligently every month. If you find that you might not be able to make a payment, contact your credit provider and arrange to pay less or at a later date. If you’re forgetful and miss payments accidentally, then you should set up recurring payments to ensure that your payments are always made on time and in full.

  • High spend on your account If you’re spending more than you can afford to pay back, your credit provider will pick up that there’s overuse of credit, which means you have more debt than you can pay off. A credit card should be used as a backup or a tool to keep your credit score healthy, so make sure that you only use it in emergencies or for purchases you can pay off before interest is charged on them.

  • Lower spend on your account If you’re no longer using your credit card, your credit provider will start to gradually decrease your limit because you’re no longer using the funds. To avoid this, you could try using your credit card for everyday shopping but paying off the full amount every month, so you don’t pay interest. That way, your card becomes a tool to maintain a healthy credit score.

Why would a bank want to increase your credit limit?

When you're offered an increase on your revolving credit it shows that you are a good borrower – you pay your debt on time and aren’t a high risk to the lender. Although this is positive, you should only take them up on their offer if you understand how to use an increased credit limit to your advantage. For instance, using only 30% to 50% of your available credit limit has a favourable impact on your credit score, so if you can discipline yourself not to use all the credit in your new limit, a higher limit actually makes your score better. But if you spend to the new limit and then hit a financial speedbump, you might have difficulty making payments, which is not good for your score.

How would a credit limit change impact your credit score?

If your credit limit is decreased, your credit score might take a knock, but it doesn’t necessarily have a direct impact on it. It might be the reverse: if a drop in your credit score is what caused the cut in your credit limit, it’s an indication that you need to find out what you can do to get your credit score up to scratch again.

If you’re offered a credit increase, it means that your credit is currently in good standing. If you’re able to take the limit increase, and only use it for occasional emergencies while generally keeping a healthy portion of your limit in reserve, it could make your credit score even healthier.