While credit card companies are required to give you 45-days’ notice before making key changes to your account’s terms, that usually doesn’t include credit line reductions. In other words, your bank most likely won’t tell you before it lowers your spending limit.
It’s actually interesting to note that people’s spending limits are routinely decreased without their knowledge.
First of all, it was common for banks to reduce their customers’ credit lines en masse during the Great Recession in order to mitigate the risks associated with widespread defaults during this time period.
Banks have also been known to employ a tactic called “chasing the balance” with severely indebted consumers. This basically entails gradually reducing one’s credit limit as he or she pays off amounts owed so as to prevent them from racking up new charges that they can’t afford to pay back.
Finally, credit lines for No Preset Spending Limit (NPSL) credit cards are determined on a monthly basis, depending on the economic climate as well as the user’s spending and payment habits. If you have an Amex charge card, a Visa Signature credit card, or a World MasterCard credit card – some of the most common NPSL products – your spending power might therefore be lower in any given month compared to the month before and then higher, or even lower, the month after that.
When does an issuer have to provide advance warning?
Well, the 45-day rule – which was implemented as part of the Credit CARD Act of 2009 – applies to impending changes to a credit card’s interest rates or fee structure as well as to other “significant changes.”
You can’t get too much vaguer than that, and most consumers would likely argue that few aspects of a credit card account are more important than how much it enables you to spend. So, what exactly constitutes a “significant change”?
“Significant Changes” Defined
The Board of Governors of the Federal Reserve System – which was the regulatory body in charge of implementing the CARD Act – defines a “significant change” as “an increase in the minimum payment, the acquisition of a security interest, and changes to the APR, issuance fees, fixed finance charge/minimum interest charge, transaction charges, grace period, balance computation method, cash advance fee, late payment fee, over-the-limit fee, balance transfer fee, returned-payment fee, required credit insurance debt cancellation/suspension coverage, amount of available credit, and the reference for billing error rights,” according to commentary published by the Federal Reserve Bank of Philadelphia.
That’s obviously a lot to take in, but at least the definition lends some specificity to the amorphous idea of a significant change. Still, the distinction between those potential changes and a credit limit decrease understandably confuses many consumers.
The Exceptions to the Rule
According to the Truth in Lending Act, a bank does have to notify you if a credit line reduction would trigger an over-limit fee as a result of bringing your spending limit below your existing account balance.
However, you shouldn’t expect to benefit from this exception because most banks will simply waive any corresponding penalty fees in order to avoid having to provide advance notice of the limit decrease. Notification would defeat the purpose of lowering the credit limits of the riskiest consumers, after all, as folks would simply go out and spend up to their existing limits before the changes go into effect. The risk associated with such behavior outweighs the benefit of charging fees in the minds of creditors.
Implications & Advice
Having your credit line lowered can cause a ripple effect across your financial life, especially when it’s not expected. Not only might it lead to credit score damage, but it could also throw a wrench into monthly payments that are automatically withdrawn from your credit card account and even prevent you from making a transaction in an emergency situation.
With that in mind, here are some tips for minimizing the impact of your bank lowering your credit limit:
- Review Your Mail: While advance notification is not required, all credit card companies will send you a letter informing you of a limit decrease once it has been put into effect. However, considering how much mail we all get, it’s understandable that you could miss this important notice. That’s another reason why reviewing your monthly credit card statements is so important. Your account statement lists both your balance and your available credit, and irregularities with these numbers can indicate that your credit limit was lowered, that a potentially costly mistake has been made, or that you’ve perhaps fallen victim to fraud.
- React Accordingly: Should you discover that your bank lowered your credit limit, you may need to make adjustments to monthly bills that you’ve set your card to pay on a recurring basis and also open a new credit card in order to avoid a reduction in your aggregate available credit, which would impact your credit standing.
- Don’t Close Your Account: While you can certainly choose to stop using a given credit card account after its issuer reduces your spending power, it’s best not to rashly close your account because doing so will further reduce your available credit and exacerbate the credit score implications of the initial credit line cut.
- Complain (Politely): It doesn’t hurt to ask a bank for the reason behind your credit line decrease. Not only will doing so give you a better idea of how credit card companies perceive your creditworthiness, but it will also give you an opportunity to offer additional documentation that might lead them to reverse the decrease.
While having your credit limit fall typically isn’t a positive event, the fact that credit card companies aren’t required to inform you of the change ahead of time does ultimately make sense.
After all, spending limits aren’t necessarily constant, depending on what type of card you have, and you won’t have foresight of the limit you will get approved for at the time you apply for a new credit card account. A limit decrease isn’t even necessarily an indictment of your financial performance, as they’re often applied uniformly to large segments of a bank’s customer base as the result of shifts in the economic climate and/or the bank’s health.