Imagine receiving a message that your bank has reduced your credit card limit. Naturally, your first question would be, “Why did the bank do this?” Many people experience this, and banks usually reduce credit card limits for specific reasons.
In some cases, the customer’s behavior is a factor, while in others, the customer may not be directly responsible. Here are the main reasons behind such decisions.
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Increasing Defaults on Credit Card Payments
Recent data from TransUnion CIBIL reveals a rise in credit card defaults. The default rate increased from 1.6% in March 2023 to 1.8% in June 2024.
One contributing factor is the growing popularity of Buy Now, Pay Later schemes and e-commerce EMI purchasing plans.
Moreover, outstanding dues on credit cards have also risen significantly, from ₹2.6 lakh crore in March 2024 to ₹2.7 lakh crore in June 2024. Comparatively, this figure was just ₹2 lakh crore in March 2023.
Payment Behavior and Credit Score Impact
If you frequently delay paying your credit card bill, banks may classify you as a high-risk customer, leading them to reduce your credit limit.
Late payments negatively impact your credit score, while timely payments improve it. Additionally, consistently paying only the minimum amount due is detrimental to your credit score.
How Credit Utilization Ratio Affects Your Limit
Banks also consider your credit utilization ratio, which measures how much of your available credit you use. For example, if your limit is ₹1 lakh and you spend ₹40,000, your credit utilization ratio is 40%.
A ratio below 30% is considered healthy, while one exceeding 70% raises concerns. High utilization indicates heavy reliance on credit, which might lead banks to reduce your limit.
What to Do If Your Credit Limit Is Reduced
If your bank reduces your credit limit, contact their customer care to understand the reason.
If you’ve defaulted on a payment, explain your situation and request a review. The bank may reinstate your previous limit if your explanation satisfies them.