Ask an expert: 'Can the bank just reduce my credit limit?'

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Q. I hold several credit cards, which I use for different purposes. However, despite never missing a payment and having an excellent credit score, my credit card provider contacted me out of the blue to say it would be reducing my credit limit. Can companies do that - and what can I do now?

Submitted via the Which? Money Helpline.

A.

As a customer with a solid track record of repayments, it can be shocking to have your credit limit slashed - but your provider is generally allowed to reduce your limit at any time under the terms of your deal.

In truth, there are a number of reasons why lenders decide to cut credit limits, and not all of them are within your control.

Why would the bank lower your credit limit?

As a general rule, lenders will tend to lower your credit limit to tighten up outstanding risk.

In some cases, that might reflect your spending habits - so if you regularly miss payments, your provider may decide to lower its liability by reducing your available credit.

Likewise, if it receives information from a credit reference agency that your score has dropped, it may also decide to pull back the amount of credit available to you.

But even customers with an impeccable payment history and good credit record can be affected, as providers will analyse individual spending patterns to look at the way you use your limit. If you rarely use your card, or don't come close to approaching your limit, they may decide a lower line of credit is more appropriate.

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Credit limits and responsible lending

Responsible lending is a key consideration for credit providers - and this includes managing their exposure to debt. If you have a credit limit of £5,000, the provider needs to be able to lend you this amount, and bear the risk of you not repaying. Lowering a borrower's limit reduces the amount of potential debt the bank has to carry.

In some cases, financial institutions will make a policy decision to lower their credit limit across an entire group of clients, regardless of each person's circumstances. That reduces the bank's overall unused credit ratio - the gap between what borrowers have spent and what they have have the potential to spend.

Credit providers are under increasing pressure to lend responsibly, with the FCApreventing banks from increasing credit limits for struggling customers. In these circumstances, institutions may be especially eager to show they are providing customers with appropriate credit limits.

How will reduced credit affect your credit score

If you don't regularly use your full credit limit, and aren't planning to apply for a large loan, a lower credit limit may have little impact on you.

But if you're carrying a balance on your card, a lower limit may increase your credit utilisation rate (the amount of credit you're using compared to the limit on your card).

Say your balance is £500. If your limit is £2,000, your credit utilisation rate is 25%. But if your limit drops to £1,200, your rate jumps to over 40%.

If you're applying for a loan (including a mortgage) the lender will look at your current credit utilisation rate. As a rule of thumb, it's advisable to keep this ratio under 30%. A higher rate can damage your credit score and reduce your chances of being approved.

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What should you do if your limit is lowered?

Finding out your credit limit has been reduced can be an unwelcome surprise. But you have a few options for what to do next.

1. Check that no mistakes were made in your credit history or payments

If you believe your track record is strong, check that there are no errors in your credit history. If an error has been made, you can contact your credit score provider or the individual lender to try to get this rectified. Similarly, missed payments can be another explanation behind the bank's actions, so check your bill payments are going through on time.

2. Contact the issuer to make a case for yourself

If you want to see your limit restored, you can call your credit card issuer to make a case for yourself. Perhaps you've used your card less due to an extended overseas holiday or an illness - or you might have a specific reason for wanting a higher credit limit. While the bank is under no obligation to change their decision, providing a back story may help your case.

3. Pay down your balance

To prevent your credit score being dragged down, you should try to pay down any outstanding balances on the card. This will bring down your credit utilisation rate and improve your credit score.

4. Consider transferring the balance

If you need a higher limit, and the bank refuses to budge, you could try opening a card with a new provider and transferring your balance.

5. Don't immediately cancel the card

You may be tempted to close your account, but this can backfire. Having access to a range of credit options can improve your credit score, even with a lower balance - and cancelling your card immediately after the limit is reduced may set off alarm bells to other lenders. Keep using the card for smaller payments and pay off the balance in full each month.