Leaning on a credit limit in a faltering economy is like expecting a weak bridge to weather a storm and lead you to survival.
It is not uncommon for credit card issuers to minimize their risk by lowering credit limits or closing accounts when there is a risk of economic distress. Credit card issuers took these steps during the Great Recession and at the start of the COVID-19 pandemic, according to a 2022 report from the Consumer Financial Protection Bureau, possibly due to changes in credit profiles, internal account performance measures or changes in the issuer’s risk management. Strategies.
Even as an uncertain option, a credit limit remains a gateway to preserve to supplement or support an emergency fund, especially before a possible recession. There is no foolproof strategy to prevent an issuer from lowering credit limits or closing accounts, but certain actions can minimize the impact on your portfolio and credit ratings.
In March and June 2020, many accounts held by cardholders, even those with high credit scores, were closed due to inactivity, according to a CFPB special memo from the same year. Inactive cards do not earn money back to the issuer in fees, so they pose more risk to the issuer during tough times.
It’s worth keeping credit cards open and regularly charging for planned purchases to give issuers one less reason to touch your account, but that might not be enough.
For Timothy Barnes, an auto mechanic based in Rocky Mount, North Carolina, it didn’t matter that he was still employed at the end of 2020 with active accounts in good standing. A major issuer closed several of its accounts, removing more than $17,000 of available credit.
“It was a day when I was buying something online and the credit card was declined,” says Barnes. “They said it was a risk, but I didn’t even miss a single payment.”
Previously, some lenders did not provide cardholders with reasons for credit limit reductions. In May 2022, the CFPB’s advisory opinion on the Equal Credit Opportunity Act asserted that lenders must provide a “notice of adverse action” explaining the reason for adverse decisions.
Consider asking for a higher credit limit on frequently used credit cards if you pay on time and don’t use more than 30% of your available credit. Income is another factor that issuers consider for a credit limit increase, says Derek Mazzarella, certified financial planner at Glastonbury, Conn.’s Gateway Financial Partners.
“If your income has increased since your last credit card application or if you haven’t updated that in a while, I would make sure your income is actually updated,” Mazzarella says.
Some issuers allow you to update your earnings by logging into your account, and they use this information to increase the credit limit, no application necessary. Credit ratings may drop temporarily when applying for an increase, depending on the issuer, so ask how credit is affected before doing so.
One of the most important factors in credit scores is usage, or how much credit you have versus how much you use. A credit limit increase can increase available credit and help build credit scores. The reverse is true if a credit card issuer hacks a credit limit later – scores will take a hit. Discounts from one issuer can even have a ripple effect on the limits of other credit cards.
A credit limit increase may mitigate the impact of a future reduction, but it does not protect against an account closure, which can also lead to lower scores.
“My credit changed pretty much after they did that, but before that it was exceptional,” Barnes says.
Weigh the potential pros and cons of applying for funding in the near future to determine the best path to take.
Barnes had multiple credit card accounts with one issuer because it was convenient. Fortunately, he also had an emergency fund and a few other credit cards that weathered the economic storm of 2020.
Consider building other bridges by opening a credit card at another institution if you don’t already have one. If you tend to overspend, stick to a lower credit limit to limit your spending, Mazzarella says.
Reapplying for a card may cause a temporary drop in credit scores, but probably not as much as a reduction in credit limit. For flexible spending, look for a general purpose credit card accepted by most merchants.
Use your available credit carefully so that it remains manageable. If possible, keep your finances under control by:
- Manage current credit cards responsibly before opening another one.
- Space out credit card applications by six months or more to lessen the impact on credit scores.
- Use less than 30% of available credit.
- Pay more than the minimum on time.
- Have an emergency fund to avoid depending on credit cards.
- Create a plan to pay off large purchases before adding to a card’s balance.
- Ask credit card issuers to keep your credit limits or accounts open if they intend to take action on them.