Learn why a credit limit decrease can actually hurt your credit score.
There are a lot of factors that go into calculating a credit score, so it’s no surprise that there are a handful of confused consumers who have questions about what makes their score bob up and down. A common question that leaves most people scratching their head is: Will my credit score improve if I request a lower credit card limit?
It’s pretty cut and dry, but let’s go through all the situations why it’s not in the best interest of your credit report to reduce your credit limit — and the one scenario where it actually might make sense.
Should I decrease my credit card limit?
Most of the times, the answer is no. This is because your credit utilization ratio accounts for about 30% of your credit score. By asking for a lower credit card limit, you’re directly increasing your credit utilization ratio which will negatively impact your score.
Besides that, having a good amount of credit available at your disposal can help out financially when unexpected expenses pop up out of the blue.
Another reason you wouldn’t want to decrease your credit card limit is because a line of credit reduction has no positive impact on your credit score.
When would asking for a lower credit limit make sense?
Despite what was previously just stated, when high credit limits are too tempting and you can’t control your impulse to spend, you’re better off asking for a decrease in your credit limit — or just cut up the card — in order to eliminate any spending outside of your means.
How will a credit limit decrease affect me?
You may see an initial negative impact on your credit score, however, you’ll be minimizing any chances of spiraling into a heap of debt and causing serious damage to your credit score later.
If you’re considering lowering your credit limit, it’s also important to factor in whether you have any planned purchases coming up. You’ll want to make sure it doesn’t completely limit your spending power, especially if you rely on that card for emergencies.
Keep in mind that it doesn’t matter if you or your bank reduced your credit limit, either way it’ll generally result in a drop in your credit score because of the increase in your credit utilization ratio.
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How to reduce your credit limit in 5 steps
If you’ve maxed out your credit card in the past or find it hard to stick to a budget, you can curb the temptation to spend by reducing your credit limit as you pay off your credit card. Here’s how:
- Find out what your current credit limit is. You’ll need to know this number when making a request to decrease your credit so you can get a ballpark range of how much of reduction you’d like. Your credit limit is typically listed on your statement, online banking or mobile app.
- Determine your current balance on the account. Lenders will never accept a request to lower your credit limit past the amount you already owe on the card. So if your card is maxed out, asking for a limit decrease would likely be impossible.
- Make a calculated decision regarding how much you want to lower your line of credit. When asking the lender to adjust your credit limit, be sure that you won’t be relying on that card too heavily in the future. If you cut your limit too much, the process of requesting a credit increase will result in the lender running a hard credit pull, which could ding your credit score.
- Contact the lender. You can reach your creditor either on the phone, by email or mail. Once the lender has approved your request and you’ve confirmed that a credit line decrease is what you want, the reduction will happen almost immediately.
- Opt-out of any automatic account review programs. Creditors will routinely do maintenance on your account and increase or decrease credit limits as they see fit based off of your activity. To avoid having your credit limit being increased without your knowledge, contact the lender to find out how to opt-out of any automatic credit limit increases.
Unless you don’t trust yourself and you’re only decreasing you credit card limit as a preventive move to steer clear of potential debt, you should leave your line of credit right where it is.
To improve your credit score, focus on positive credit building habits like paying the balance in full and on time each month, keeping your credit utilization ratio low and leaving your accounts open to grow the length of your credit history.