The COVID-19 outbreak has had a devastating impact on the U.S. economy. While employers added a promising number of new jobs last month, unemployment is still in the double digits. Although Congress has passed three economic stimulus packages—totaling almost $3 trillion—many folks are still barely scraping by.
In response to the pandemic, some banks have reduced their risk by tightening lending standards or slashing consumer credit. According to a recent CompareCards report, 50 million credit cardholders have had their credit limits lowered—and some have had their cards closed altogether.
Lower credit card limits or closed cards are more than an inconvenience. These moves may reduce your credit utilization, which impacts 30% of your credit score—the second most important scoring factor.
Your credit utilization is your percentage of used credit across all cards. For example, if your available credit limit is $10,000, and your total balance is $2,000, your credit utilization is 20%. You should try to keep your credit utilization below 30%, according to Experian—but a lower percentage is even better.
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How to avoid (or deal with) a credit limit reduction
One of the easiest ways to avoid surprise cuts or closings is by keeping your cards active. Dormant or rarely-used cards are the most likely to be impacted, according to CompareCards. This is because banks make money from fees and interest. If you don’t use a credit card, the bank is less likely to make money—and may prefer to minimize its risk.
If you experience a limit cut, a card closing or you want to avoid either scenario, the CompareCards report recommends the following tactics:
During a financial crisis, it may be easy to focus on dips in your credit score. But it’s more important to take care of the basics—like paying for rent, utilities, food and transportation. If you’re struggling to make ends meet, it may be possible to get assistance from your lenders. Once your situation changes, you can work on improving your credit score again.
