Understanding Your Credit Card Limit: 3 Things to Know

“We’re lowering your credit card limit,” is the last thing a business owner wants to hear.

Businesses often use credit cards in the same ways that people do in their personal lives. This is not necessarily a bad thing. Credit cards are unsecured loans, meaning you do not have to put down collateral to use the money. Putting your purchases, and those of your employees, on a corporate credit card can help you track spending and eliminate the need for reimbursements. Just like personal credit cards, corporate credit cards often help you earn points or cash back.

However, just like personal credit cards, it’s easy for the credit companies to change your credit card limit. Covid-19 and the current economic crisis mean many businesses and people are relying on credit cards more than in the past. Unfortunately, credit card companies have also reduced credit limits on many holders. If you’ve had your credit limit reduced, here are 3 things to know.

1. Your Credit Limit Does Matter

Even if you are not planning on using your credit card, the credit limit matters. Your credit utilization rate is a key factor in determining your credit score. The utilization rate is how much you owe versus your total credit limit on all cards. For example, if you have three cards with a total limit of $20,000 and you owe $10,000, your utilization rate is 50%. You are using 50% of your available credit. If the bank reduces the limit on one card from $10,000 to $5,000, your total limit is now $15,000 and the $10,000 outstanding results in a 67% credit utilization rate. A higher utilization rate makes you a riskier bet and results in a lower credit score. Lower credit scores make it harder for you to obtain a loan. Customers with lower credit scores also receive higher interest rates. Unfortunately, you do not have a right to a specific credit limit. Even if you agreed to a higher interest rate in exchange for a higher credit limit, the credit card company can change your credit limit at any point. However, the card company can’t charge you a fee for being over the credit limit for the first 45 days after changing your limit. If they lower your limit, pay down your balance to be under the new limit as soon as possible to avoid being charged fees.

2. Being a Good Customer Is Important

Using your cards responsibly, paying on time, and keeping your utilization rate under 30% all help to show you are a lower risk. Doing this typically keeps companies from lowering your limit. Occasionally, credit card companies will also lower your limit because you are not using the card. If this happens, you can often appeal the decision. However, in a bad economy, companies sometimes lower limits no matter what you do.

If you do not see a clear reason for a lowered limit, contact the credit card company. You may need to talk to several people before getting an answer and a change. If there is an incorrect reason, ask how it can be corrected. Credit bureaus that the card issuer relies on do make mistakes.

3. You Should Not Take Out New Cards

If you want to keep your credit utilization rate low and you receive a lower credit card limit, you may be tempted to apply for a new card. However, this is not necessarily a great idea. Every time you apply for credit, it creates an inquiry on your credit report. If there are a lot of inquiries on your credit report, that’s a negative factor in your credit score. Remember, your credit score is just as important as how much credit you have available.  If you decide to apply for a new card, pick one to pursue and talk to them before you formally apply. This will give you a sense of how likely they are to approve your application.

Credit cards are just one way to keep your business operating in difficult economic times. If your financial issues are cause in part by unpaid invoices, contact us. We can help you collect the money that others owe you, so that you do not have to rely on credit cards.

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