Most people enjoy having a high credit limit on their credit cards since it can provide a sense of security. Not surprisingly, a decrease in credit limit is usually worrisome, and could make borrowers wonder what they did wrong. In many cases, the answer is that the borrower is too close to his credit limit, has a lower credit rating than before, or has had a change in financial circumstances that worries the creditor. On the other hand, sometimes the decrease in credit limit has little to do with the borrower, and much to do with the creditor.
Borrowers who constantly carry a high balance on their credit card are often perceived as a risk to creditors. While some people believe that carrying a high balance is encouraged by credit card companies due to the money the company makes off interest rates, many companies are worried that such borrowers will not be able to pay off the card. Borrowers who never seem to pay their balance down could be seen as likely to be late with payments, start missing them altogether, or eventually declare bankruptcy. Few creditors want to let the situation get to this point, so they may initiate a decrease in credit limit to keep their risk low.
Even borrowers who carry a low balance and constantly make their payments on time could be affected by a decrease in credit limit. This is because many credit card companies keep an eye on the behavior of the borrower toward other creditors. Closing accounts, being delinquent with payments on other cards, and increasing debt can all worry creditors, even if they are not directly affected by these changes.
Additionally, a creditor may look at other aspects of a borrower's life that do not appear immediately on a credit report. A recent reduction in pay, participation in a credit card hardship program, foreclosure, or other major financial crises may be worrisome to creditors. Most will not find out about these issues until they affect the credit report, but if they do, they can initiate a decrease in credit limit.
Unfortunately, even those with perfect credit and impeccable handling of their finances could be affected by a sudden decrease in credit limit. In times of financial crisis, such as a difficult economy, many creditors want to decrease their risk. They usually do this by attempting to get their money back as quickly as possible, decreasing credit limits and increasing interest rates. Though the borrowers who are considered the highest risks are usually the first to be affected, those who have no credit card activity or pay in-full every month are also the main targets of a decrease in credit limit since the company makes no money off them. Eventually, those who keep their balance just below the recommended 50 percent of their limit will likely be affected, as well.
