Many credit card companies and banks occasionally reduce the credit limit on customers’ cards.
This is a common practice and is usually done under certain circumstances. Here are the main reasons why a bank might lower your credit limit.
1. Payment Default
According to the Reserve Bank of India, credit card defaults increased to Rs 4072 crore by March 2023.
If you frequently delay paying your credit card dues, the bank may view you as a risky customer. It perceives that you might not have enough funds to repay your dues easily and, consequently, reduces your credit limit.
2. Carrying Forward Outstanding Amounts
Many people carry forward their dues to the next month after paying the minimum due on their credit card.
While this is acceptable if done occasionally, making it a habit increases your outstanding debt, posing a risk of falling into a debt trap.
This situation makes it difficult for you to repay the loan, prompting credit card companies to reduce your limit.
3. High Credit Utilization Ratio
Using a large portion of your credit limit can also lead to a reduced credit limit. The utilization ratio is the amount you use compared to your total limit.
If you consistently use 80-95% of your credit limit, credit card companies might consider you a risky user who relies heavily on credit and, therefore, reduce your limit.
4. Holding Multiple Credit Cards
Having several credit cards can quickly increase your total credit limit. If you hold multiple cards and use them extensively, banks may view you as overly dependent on loans, considering you a risky user. This perception can lead to a reduction in your credit limit.
5. Minimal Credit Card Usage
Some customers rarely use their credit cards, either due to lack of understanding or preference.
Banks might reduce the credit limit for such customers because they benefit more when customers frequently use their cards.
