Can Credit Card Issuers Reduce Credit?

Credit card issuers regularly review customers' credit limits after checking credit reports or payment history. Sometimes card companies arbitrarily decide to increase the limit, and sometimes they decide to reduce it. it's all perfectly legal because the credit agreement between the debtor and the card company is strictly voluntary. Either side can end the agreement at any time, with the card company reserving the right to reduce or end credit privileges whenever it wants.

Credit Reports

Card companies sometimes reduce credit limits after seeing negative information on credit reports, such as settlements, late payments on other accounts or charge-offs. Negative information on credit reports suggests a debtor is having financial problems, and a card company may reduce the debtor's credit line as a result. A settlement means a debtor resolved an account by paying less than the full balance through debt settlement. A charge-off indicates that the debtor stopped paying an account as agreed, forcing a creditor to close the account. Both are very harmful to credit.

Exposure

Even debtors with great credit scores and a clean credit report could receive notice that the card company is reducing their credit line. Because of financial reasons, some card companies may elect to reduce the overall amount of credit they are extending to customers. This sometimes happens during a deep recession or other tough economic period, when card companies may fear people will start living on credit if they lose their jobs because of layoffs. In 2009, ABC's "Good Morning America" reported how a bank reduced one couple's credit limit from $15,000 to $7,500. The card company later explained to the couple that it made the reduction because of a "current economic crisis."

Effects

A reduction in credit could affect a debtor's credit score. The FICO credit scoring model rewards people who have large credit limits but use only a small portion of it. A person with a $5,000 credit limit who never carries a balance of more than $500 is using credit responsibly. However, the debtor's credit score could theoretically drop if the card company reduces the credit limit on the card to $1,000. That would increase the percentage of credit the debtor is using, a key factor for credit scoring.

Solutions

Debtors with reduced credit limits should simply continue paying their accounts on time while keeping balances low. Writing a letter to the bank asking for a reconsideration is an option for debtors who pay their bills on time. Debtors with credit problems should work on improving their overall credit and not worry about a reduction in credit limit.