Reasons Your Credit Limit Could Be Low

A credit card issuer or other lender might assign you a low credit limit based on a number of factors. These could include your income, credit history (or lack thereof), and their internal policies for managing the risk that their customers won’t repay what they owe. Here’s an overview of why you might have a low credit limit, and what you may be able to do to change it.

Low Credit Score

Lenders use credit scores to evaluate the likelihood you won’t pay your bills. The lower your score, the greater the perceived risk that you’ll fail to repay. If your score is sufficiently low—exactly how low is determined by each lender independently—the issuer may deny your credit application. But if your score is on the low end of the range the lender deems acceptable, they might approve your application but give you a low credit limit.

Limited Credit History

If you are a new credit user or an immigrant whose past credit usage isn’t recorded at the U.S. credit bureaus (Experian, TransUnion, and Equifax), your creditworthiness is unknown to lenders. A credit card issuer therefore might offer you a modest credit limit to start. Once you’ve shown over time that you use the card responsibly and make your monthly payments on time, the issuer may be willing to increase your credit limit.

Triggering Credit Behaviors

Credit card issuers may review your credit reports for signs of financial instability, such as excessive balances on revolving accounts, late payments, or frequent cash advances. These could serve as red flags, prompting an offer of a small credit limit on a new account or a lower one on an existing account.

Recent Credit Limit Cut

If your credit report shows that one of your existing lenders recently lowered your credit limit, a lender considering a new application might give you a smaller credit limit than they’d otherwise offer, until they can confirm that your finances are stable.

Can Your Credit Limit Decrease?

Yes, your credit limit can decrease under certain circumstances. As spelled out in your credit agreement, a lender typically can reduce your credit limit at its discretion. A reduction can be in any amount, including one that cuts your credit limit to the amount of your current balance, so that you must repay part of what you owe before you can make any new charges.

Note: If a card issuer reduces your credit limit, and interest or other charges cause your balance to exceed the new credit limit, they cannot charge penalties for exceeding your borrowing limit until at least 45 days after they notify you of the credit limit reduction.

If a lender reduces your credit limit in response to your behavior, it typically must provide a letter known as an adverse action notice, explaining the reason for the change. Reasons could include:

• A significant decline in your credit scores
• Patterns of balances that exceed your borrowing limit
• Several late or missed payments

Lenders also sometimes reduce credit limits for reasons that have nothing to do with you. During the COVID-19 pandemic, for instance, some card issuers reduced credit limits on accounts that had been inactive for extended periods (or even canceled them altogether) to rein in the total amounts they might have to lend at a time of market turbulence.

How a Low Credit Limit Affects Your Credit Score

Credit limits help define your credit utilization ratio, or rate, one of the most important factors that influence credit scores. Utilization rate—how much of your credit limit you’re using on revolving accounts such as credit cards—is responsible for about 30% of your FICO® Score. (Utilization rate is only slightly less influential than payment history, the single most important credit score factor which accounts for 35% of your FICO® Score.)

Utilization rates greater than about 30% can have a more pronounced negative effect on your credit scores. The lower the credit limit on an account, the greater the impact of any given balance on its utilization rate.

Example: A $300 balance represents a 10% utilization rate on a credit card with a $3,000 credit limit, but 15% on a card with a $2,000 credit limit. If either card issuer reduces its credit limit to $1,500, the utilization rate would increase to 20% for the same $300 balance.

When a lender lowers your credit limit, the action can raise your utilization rate even if there’s no balance on the affected account. Credit scoring systems such as the FICO® Score and VantageScore® consider overall utilization rate—the sum of all outstanding revolving balances as a percentage of the sum of all credit limits—as well as utilization on individual accounts.

So, if you have an outstanding balance on any revolving account, a reduction in its credit limit—or to that of any other card or credit line—will increase your utilization rate.

3 Ways to Increase Your Credit Limit

Because credit limits can affect credit scores, steps you can take to improve your credit scores, such as making payments on time, avoiding high balances, and seeking new credit only as needed can increase your chances of getting higher credit limits. Checking your credit reports and scores regularly can help you track progress in these efforts.

As your efforts progress, you can try any of these strategies to increase your credit limit:

1. Request a Credit Limit Increase

It never hurts to ask. Smartphone apps and web portals for many credit cards let you request a credit limit increase with a simple click, and many provide instant responses: If an increase is approved, it’ll be applied to your account immediately.

Typically, you’ll have to wait until you’ve had a card at least a year before seeking an increase, and any request made less than six months after an increase may be ignored. You can also ask for an increase, or learn more about why a request for one was denied, by calling the customer service number on your card.

2. Update Your Income Information

If your earnings have increased significantly since you obtained a credit card, you could qualify for an automatic credit limit increase. Income isn’t recorded on your credit reports, however, so your card issuer won’t know about your higher earnings unless you tell them.

You can update your income in the profile section of your card management website or mobile app. Resist the temptation to exaggerate, since the card issuer could ask for backup documentation such as pay stubs or tax returns before they OK an increase in your credit limit.

3. Look for a New Credit Card

Obtaining a new credit card increases your total available credit and lowers your overall credit utilization rate. If your new card has a low- or zero-interest balance-transfer promotion, you also can use it to lower a high utilization rate on one or more of your existing cards, by paying down their outstanding balances with the new card.

You can’t know for certain how large a credit limit you’ll get until you apply for a new card. Applying triggers a credit check known as a hard inquiry that can cause a small, temporary drop in your credit scores.

Applying for multiple credit cards at once can cause a cumulative drop in your credit scores, so consider shopping around by using prequalification services available. Prequalification doesn’t require a hard inquiry, and it can give you a reasonable estimate of the credit limit and interest rate you qualify for, based on your credit score and your answers to a few questions.

The Bottom Line

Low credit limits can be par for the course for new credit users, but they typically aren’t permanent. If you maintain good credit habits, as your credit history increases (and your income grows), you’ll likely qualify for increases in the borrowing limits on existing cards, and new cards that offer higher credit limits to begin with.

Before applying for new credit cards, consider checking your FICO® Score from Experian to help you know where you stand. Experian also can help you shop for new credit cards by identifying card offers well-suited to your credit profile.

For any mortgage service needs, O1ne Mortgage is here to help. Call us at 213-732-3074 to speak with one of our expert loan officers. We are committed to providing you with the best service and helping you achieve your financial goals.