If a creditor, including a credit card company, lowers your available credit, it may be a symptom of a larger financial problem. Lowering your available credit can damage your credit score and make it more difficult for you to secure new credit, including a personal loan or credit card. Finding the root cause of your credit score problem is a key element in repairing your credit rating.
Overall Available Credit
When a creditor lowers your credit limit, it affects the overall available credit for all your accounts. The lower your available credit, the more your credit score suffers, assuming the amount of debt you carry does not change. Your credit score is negatively affected because your debt increases relative to your available credit. The amount of debt you carry relative to your credit limit is called your credit utilization ratio or debt-to-credit ratio. The higher your credit utilization ratio, the more it damages your score. If your credit limit is reduced while your debt stays the same, your credit utilization ratio will rise, thus hurting your credit score. A creditor examining your credit report for a potential loan may deny your loan application because of a high credit utilization ratio, even if it is caused by a lower credit limit and not by an increase in spending.
Reasons to Lower Available Credit
A creditor may choose to lower your available credit in response to a sudden drop in your credit score caused by a variety of credit actions, including a foreclosure or defaulted loan. Your creditor lowers your available credit because your lower credit score represents increased risk for the lender. Basically, your creditor is attempting to minimize your ability to use your credit to solve your other financial problems as well as limit your ability to accumulate a large amount of credit card debt.
Fixing the Damage
Paying down your credit card balances helps minimize the damage to your credit report caused by a drop in your available credit, because it reduces your credit utilization ratio. You should continue to pay your bills on time and use your cards sparingly until your balances are paid off. Dealing with the root financial cause of your credit problems -- which may involve a home loan or car loan you are having trouble paying -- helps repair your credit in the long term. Once your finances are in order, you can call your credit card company and ask for an increase in your credit limit. Your creditors are not obligated to give you this increase, but the chances are more favorable if you have improved your debt situation and your credit utilization ratio.
Checking Your Credit Report
The Fair Credit Reporting Act requires all three major credit reporting bureaus to provide you with a free copy of your credit report once every 12 months by requesting it through AnnualCreditReport.com. Reviewing your report helps detect reporting errors and may eliminate negative notations that may damage your credit score. To dispute inaccurate notations on your report, you must contact the credit bureau online or in writing. The credit bureau is required to investigate your claim within 30 days of receipt of your dispute. Federal law requires the credit bureau to remove negative items from your credit report if it cannot verify the validity of the entry in question.
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