Five Reasons Why Banks May Reduce Your Credit Card Limit

Credit card limit is typically determined by the customer’s monthly income, default risk, and spending habit. Yet, there may be situations where an unexpected reduction in your card limit could catch you off guard. In a July 23 post on X, formerly Twitter, a customer, tagging the SBI Card, wrote: “It took me 5 years to increase my limit. Now you have decreased the limit to 50-100 per cent.” In the same thread a few users alleged of reduction of more than 80 per cent. 

RBI data shows that total number of credit cards rose to 8.53 crore in FY2023 from 7.52 crore in FY2022. Total credit card outstanding was Rs 1.94 lakh crore as of March 2023 against Rs 1.48 lakh crore in the same period a year ago. The data suggests that not just numbers of card has increased but default has also surged by around 30 per cent in last one year as of March 2023. These defaults lead to card companies to reduce credit limit of defaulters. 

However, many factors could contribute to banks’ decision to reduce your credit card limit. For instance, the SBI Card said on its website: “SBI Card may review credit limit for cardholder’s account, which include but not limited to account performance, cardholder’s spending, payment and delinquency patterns, credit bureau history, behavior score, and other portfolio triggers."

“Pro-active limit decrease, which may be permanent or temporary, initiated by SBI Card, is informed to customers through SMS/e-mail/letter,” it adding.

Let's delve into the key triggers that might prompt such actions and strategies to navigate them. 

Defaults On Credit Card Payments

Delaying or missing credit card payments can raise alarm bells for your card issuer. India, credit card dues surged by almost 30 per cent as of April 2023, RBI data shows. When a customer misses out on credit card payment frequently, you might be seen as a riskier borrower. This perception can pave the way for a reduction in your credit limit. Late payments and credit card defaults contribute to a diminished credit score, making you a liability in the eyes of the bank.

Further, one should not carry forward the outstanding dues by availing the facility to pay only the minimum due amount. Instead, it’s better to repay the full amount to avoid a possible credit limit decrease. Follow these tips, to avoid credit card debts.

High Credit Utilization Ratio

Your credit utilisation ratio, which gauges your credit usage relative to your available credit, plays a crucial role. This is the ratio between the total credit debt you hold across all your credit cards with the aggregate credit limit accessible across these cards. 

Suppose you have two credit cards, collectively allowing you to spend up to Rs 1 lakh. One card has an unpaid balance of Rs 50,000, while the other has no balance owed. As a result, your credit utilisation ratio is (1,00,000 divided by 50,000) multiplied by 100, which is 50 per cent.

Sustained high credit utilisation ratios, surpassing 70 per cent, could signal a heavy reliance on credit and difficulty managing debt. This perceived risk might prompt lenders to trim your credit limit. Experts suggest that the optimal credit utilisation ratio is under 30 per cent.

Escalating Delinquency Rates

TransUnion CIBIL reported a 66 basis points (bps) year-on-year (y-o-y) increase in serious delinquency in credit cards, with payments overdue for more than 90 days reaching 2.94 per cent during the quarter ending June 2023.

Should your bank witness a surge in credit card payment defaults, particularly for those extending beyond 90 days overdue, they could contemplate slashing credit limits. Such heightened delinquency rates cause apprehension within banks, urging them to tighten their credit policies for risk management.

Swift Surge in User's Credit Limit

If you get multiple credit cards in a short period, thereby significantly augmenting your total credit limit, it might raise eyebrows at the banks. This scenario could cast you in the light of a risky borrower. Banks may lower their credit limit to mitigate potential losses related to the enlarged available credit.  
 
Another factor out of your control can also affect your credit limit. In times of economic instability, financial upheaval, and geo-political uncertainties, banks might reduce credit limits to minimise their exposure to risk. Such precautions are taken because the bank feels the cardholders might grapple with timely repayment during economic turmoil. 

Notably, instances like the Covid-19 pandemic have seen numerous cardholders face the brunt of lowered credit limits. Though these are factors beyond your control, banks pick customers to reduce their limit from the lower rung of creditworthiness. Correcting other factors may help you avoid getting your limit lowered.

Dormant Credit Cards

Credit cards that you rarely take out of your wallet can also play a role in limit reductions. Banks thrive on using credit cards, reaping fees, interest, and charges. Hence, if your card remains inactive, the bank might conclude that a credit limit reduction is prudent because banks have a fixed amount of credit limit with them that they can allot to customers. Such limitations could be reallocated to more active cardholders.

What To Do If Your Limit Shrinks?

Should you find yourself on the receiving end of a credit limit reduction, the first step is to reach out to your bank's customer service and ask them to explain the rationale behind the adjustment.

If it is an error on your part, this is an opportune moment to explain any genuine issue that might have led to missed payments or other factors that affected your creditworthiness. Once concerns have been resolved with your bank, it may reinstate your credit limit.

Regarding SBI Card, the company has said, "The customer may also submit documents for enhancement of the limit, and the same can be processed through credit approved policy on the CRM system."

Regularly monitoring your credit card usage, ensuring timely payments, and maintaining a healthy credit utilisation ratio can help you clear these potential triggers for limit reductions.