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Have you thought about calling up your credit card company and requesting a credit line reduction? There are a few reasons this idea might cross your mind. Maybe it’s because you have a high credit limit on one of your credit cards that you don’t use very much. Perhaps you are an over-spender and think you’ll spend less on your card if there is less credit available? Maybe you’re concerned about having too high of a limit if hackers were to steal your credit card information.
Before you decide to reduce your credit limit, wait – this decision could have a big effect on your credit score. Here’s why:
Think About What’s Going Into Your Credit Score
When the credit reporting agencies calculate your credit score, two of the biggest factors are: late payment history and credit utilization ratio. Credit utilization simply refers to how much of your available credit (all your credit cards and other lines of revolving credit combined) is being used. When your combined balances get closer to your max amount of credit, it has a negative impact on your credit score – which is why it’s important to keep low balances relative to the maximum limits.
If someone has an airline rewards credit card with a $9,000 limit and a gas rewards card with a $4,000 limit, then the total credit is $13,000. If one of those balances is currently $2,976 and the other is $5,024 – then the credit utilization ratio is $8,000/$13,000. That’s a pretty high proportion.
Having a lower balance on either card would be beneficial to this hypothetical customer’s credit score. If one of their credit lines were to drop by $1,500, then their credit utilization ratio would become $8,000/$11,500 – a much larger portion of their total credit limit.
How High Credit Utilization Affects Your Credit Score
As you can see, dropping your credit line can make your credit utilization increase – but that could mean different things for different credit card holders. If you:
Have Little to No Debt
If you maintain a low balance already (between 10-20 percent of your total balance is recommended), then reducing your credit limit would have a much lower effect on your credit score than if your credit card balances were higher. It really depends on how high your combined limit is. By not reducing your limit, at least you have more wiggle room to spend without breeching the 20 percent mark.
Have a Lot of Debt
If you are already carrying high balances, reducing your credit limit will make your credit utilization ratio increase. That will certainly have a negative impact on your credit score.
One situation where reducing your credit limit may benefit you is if your spending habits are out of control – and lowering your limit is the only way to stop yourself from accumulating more high-interest debt. Sure, your credit score would be harmed, but that can be better than having higher debt overall – it just depends on your preference.
Author: Jeff Gitlen
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