Capital One Cuts Some Borrowers' Credit Limits

A young man on his couch holding a credit card and his phone.

Image source: Getty Images

Capital One has announced that it's cutting credit limits for some of its cardholders. While credit card companies generally avoid doing this, they are legally allowed to cut credit limits at their discretion, and it's common during economic downturns. The high unemployment rate and expiration of the additional $600 per week in unemployment benefits were likely major factors in Capital One's decision.

Credit card companies aren't legally required to notify you before cutting your credit limit, unless the change was due to adverse information on your credit report. Since that doesn't apply here, it's important to know how you can find out on your own.

Checking if Capital One cut your credit limit

The fastest and easiest way to see whether Capital One cut your credit limit is to log in to your account online. When you log in, you'll see your credit card, your current balance, and your available credit.

You can also call Capital One using the number on the back of your credit card and ask if your credit limit has been lowered.

These reductions aren't happening on all Capital One credit cards. According to a spokesperson for the card issuer, it's basing the decision at least in part on each cardholder's account activity over the previous year. And if the past is any indication, credit limit cuts are more likely for those with lower credit scores. In 2008 during the Great Recession, U.S. banks reduced credit limits for 60% of subprime borrowers compared to just 20% of prime borrowers.

How a lower credit limit can affect your credit

When your credit limit gets reduced, the biggest thing to watch out for is how it affects your credit utilization ratio. This is a measure of how much of your credit you're using, and it's one of the most significant criteria used to determine your credit score.

To calculate your credit utilization, credit bureaus divide your reported credit card balances by your credit limits. A lower credit limit means your credit utilization will go up, and that can reduce your credit score.

Here's a simple example -- you have a credit card with a $3,000 balance and a $15,000 credit limit. Your credit utilization would be 20%. To help your credit score, a credit utilization of 20% or below is great. But what if the card issuer reduces your credit limit to $5,000? Your credit utilization would go up to 60%, which is very high and would be bad for your credit score.

What to do after a credit limit cut

If Capital One (or any other card issuer) has cut your credit limit, you can get in touch and ask it to reverse the decision. It's sometimes possible to get the card issuer to reinstate your previous credit limit with a quick phone call.

There is, of course, the possibility that the card issuer sticks with its original decision. In that case, you should review how much of your credit you're using to check that your credit utilization isn't too high. As mentioned above, a credit utilization of 20% or below at all times is ideal. You should also aim to pay your credit cards in full every month so you don't need to pay any interest charges.

Make sure you also keep that new credit limit in mind as you use your card, especially if it's one you use often or for expensive purchases. You may need to be more careful about your spending so you don't accidentally max out your credit card.

Our credit card expert uses this card, and it could earn you $1,148 (seriously)

As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.

But with so many cards out there, you need to choose wisely. This top-rated card offers the ability to pay 0% interest on purchases until late 2021, has some of the most generous cash back rewards we’ve ever seen (up to 5%!), and somehow still sports a $0 annual fee.

That’s why our expert – who has reviewed hundreds of cards – signed up for this one personally. Click here to get free access to our expert’s top pick.

The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.