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The current economic downturn caused by COVID-19 forces banks and credit card issuers take actions to protect themselves against losses. Many credit card companies started to cut credit lines, close dormant cards, and raise borrowing standards.
Credit card issuers expect that during a financial crisis like the one we are currently in, cardholders start missing credit card payments and carrying more debt. As a result, issuers will be hit financially, and cardholders accrue debt they are unable to pay off.
According to a CompareCards survey, 25% of card members in the U.S. had their credit limits reduced or accounts closed. Among them are people who have subprime credit, meaning their FICO credit scores are below 670†. While credit card issuers should inform their consumers beforehand (according to the Credit Card Act of 2009) when terms and conditions change, they are not obliged to disclose when limits are changed.
What happens when your credit limit reduced or account closed?
First of all, your options to pay for things you need every day become limited. More than that, during the pandemic, when most stores switch to online or contactless methods of payment, credit cards become the only way you can pay for things.
Second, your credit score can drop. When your credit card's limit is reduced, your credit utilization ratio may go way above recommended 30%, even worse - you may have little available credit left. When limits are lowered, the amount of credit you have decreases, which in turn raises your credit utilization and lowers your credit score.
To avoid potential credit limit decrease, try to make at least minimum monthly payments with all your creditors and avoid unnecessary expenses. Always review your monthly statements and do not forget to check your credit reports regularly.
