Why Do Credit Card Companies Lower Your Credit Limit?

When you receive a credit card, you are given a limit on the balance you can put on that account. The difference between the limit and your actual balance plays a role in your credit score.

The credit reporting agencies like to see a low balance to limit ratio. So do the credit card companies. If you have a limit of $5,000 and a balance of $4,000, it makes them nervous, even though they are earning interest on what you owe.

"I have a Gap Visa account with GE Money Bank that I have been making consistent payments to since I opened this account," Tanya, of Brooklyn, N.Y., told ConsumerAffairs.com.

Balance reduced by more than half

Hoping to buy a home, Tanya said she made a $1,000 payment on her balance last month, which cut her balance by more than half. Normally, this kind of payment looks good to credit agencies and credit card companies. In Tanya's case, it apparently didn't.

"GE Money lowered my available credit to $700 for no good reason," Tanya said. "Now on my credit report it appears as if my available credit is maxed out which affects my credit score."

A couple of years ago, in the wake of the credit meltdown, there were wholesale reductions in credit card limits. The reason was simple. The credit card companies were worried that many of their creditors would not be able to pay off their balances. Even consumers with high credit scores were not immune.

Possible reasons

As Tanya's experience shows, credit card companies are still reducing credit limits, and they could be doing it for many reasons. For one, they may have more cash needs right now, and don't want as much credit on their books.

They could also be looking at customers like Tanya, who have been carrying a balance of more than half their credit limit. Though it wasn't intended as punishment, when she took the positive step of making a big payment against her balance, the credit card company lowered her limit, meaning she won't be able to use that credit in the future.

It also has the unfair effect of making it appear that she has used all but $28 of her credit limit, making her look risky to future creditors. Even though she had taken a step to pay down her balance, Tanya feels as though she is being treated as if she doesn't pay her bills on time and has a poor credit history. She says if she had known what was going to happen, she would have hung on to her $1,000.

To the bank, it's probably a simple business decision. Banks and credit reporting agencies prefer that consumers don't use more than 30 percent of their available credit and when Tanya gave them the opportunity to reduce her limit, by making a big payment, they did.

Tanya, meanwhile, feels like the rules have been changed. As a result, she may now be less likely to buy a home.