Your Credit Limit Has Been Decreased | Why Do Banks Reduce Your Credit Card Limit?

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Having a high credit limit on your credit card can be beneficial in some cases, but it can also have drawbacks in others. However, we generally prefer to maintain a high credit limit on our credit card. Typically, we don’t receive a very high credit limit when signing up for a new credit card. However, if we use the card responsibly over an extended period, the bank might gradually increase our credit limit. Banks routinely review our credit card accounts, and if they deem us eligible for a credit limit increase or card upgrade, they may offer it.

However, banks sometimes decrease our credit card limit. There are several reasons behind this decision. Let’s delve into these reasons to better understand why.

Banks review our credit profile periodically, checking credit reports like the CIBIL report. If they identify any issues that could raise concerns about our repayment capabilities, they might decide to decrease our credit limit. Here are a few reasons related to credit profiles:

  • A significant drop in the customer’s credit score: If your credit score (such as the CIBIL Score) experiences a steep decline within a short time frame, (For example, if someone’s CIBIL score drops from 750 to 690), the bank might raise a flag on your account and reduce your credit card limit.
  • Excessive Credit Limit Exposure: A significant and sudden increase in the total credit limits across other credit cards can also be a reason. For instance, let’s say you initially have 10 credit cards with a total credit limit of 20 lakhs. Within the next year, you apply for and are approved for 10 more credit cards with a total credit limit of 70 lakhs. This means your total credit card count becomes 20, and your total credit limit increases to 90 lakhs. If your income isn’t sufficient to manage this sudden 70 lakhs jump, the older banks might decide to reduce your credit limit, citing a potentially risky credit profile.
  • Delay Bill Payment: Failure to make timely payments of credit card bills can lead to a reduction in your credit limit. If you repeatedly miss payments on your credit card bills, the bank may decide to lower your credit limit.
  • Delayed payments of bills or loan EMIs from other banks’ credit cards: If you have credit cards or loans from other banks and fail to make timely payments of bills and loan EMIs, banks may choose to decrease your credit card limit.

Those are a few reasons related to your credit profile; however, banks may also lower your limit for a few other reasons.

1. Financial or Other Problems in Your Country: If there is a financial crisis or any other adverse situation in your country due to natural or man-made factors, banks might choose to decrease their total credit exposure. This can ultimately result in the reduction of their customers’ credit limits. We witnessed such cases in 2020 when the COVID-19 pandemic affected us significantly. HDFC Bank and a few other banks decided to decrease their customers’ credit limits during that time.

2. Misusing Credit Card: If you misuse your credit card or attempt to manipulate its reward system to earn more rewards, banks might choose to cancel your credit card. In such cases, they may also opt to lower your credit limit.

What can you do if the bank reduces your credit card limit?
Banks can decrease your credit card limit without prior notice, leaving you with limited options in such cases. According to the RBI, banks cannot increase your credit limit without your consent, but they can reduce it without your consent or notification if they perceive your profile as risky.

If the bank decreases your credit limit, reach out to them via email. Inquire about the reason behind their decision and kindly request them to reinstate your previous limit. Provide insights about your credit profile and explain why you hold significance to the bank. With luck, they will consider your request.

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