Should I Lower My Credit Card Limits?

Emily writes in the following question regarding credit card limits:

“I would like to lower the limits on two of my credit cards from $6,000 to $1,500, and $7,200 to $3,500, but I’m not sure what the repercussions would be.”

“My FICO score, according to my credit union, is currently 762.”

“I read your blog several times per week.  I am happy to report that after many years of struggling, my total debt is less than $10,000 ($8,400 in student loans and $1,475 on a personal loan at my credit union).  I’m on track to be debt free in a little over a year!”

Thanks for being a loyal reader, Emily. Congratulations on your progress – you are on the homestretch now, and will soon enjoy the freedoms of being without debt.

Lowering your credit limit seems to be the responsible thing to do. After all, you are eliminating risk for the card issuer by reducing the amount of potential liability they are exposed to, and you are reducing the potential for you going on a wild spending spree and adding thousands to your debt.

Keep Credit Utilization at 30% or Lower

Unfortunately, the credit scoring gods don’t quite see it that way. One of the major components of your credit score is referred to as “credit utilization.” That is, the percentage of debt you owe in relation to your credit limit.

As an example, if you owed $3,000 on a credit card with a $10,000 limit your credit utilization would be 30%, which most agree is the sweet spot, or at least the upper end of the utilization ratio. Anything higher and it actually drags down your credit score.

If you reduced that $10,000 credit limit to $5,000, but still owed $3,000, your credit utilization would double to 60%. Maintain this level for too long and your FICO score could decline.

If you are concerned with maintaining a good credit score, and 762 is a certainly a good score, it might make sense to wait until you have paid off your balances entirely to reduce your credit limits, or to close a particular credit card account. At that time, consider how much you may be spending on the card each month and ask for a limit roughly 3.5 times that amount (round up to the nearest $500 just to be safe).

Assuming you plan to spend about $500 a month on items you purchase with a credit card (utilities, gas, etc) ask for a limit around $2,000 to ensure you stay under the 30% utilization threshold. If your billing statement cycles and a higher utilization ratio is reported to the credit bureaus, you could see a drop in your credit score, even if you pay off the card’s balance each month.

FICO Scores – Who Needs ‘Em?

Having said all that, a good FICO score is most important only if you plan to borrow again. Sure, credit scores are sometimes used to make employment decisions, and insurers often use credit scores to make underwriting decisions or to set premiums. However, it’s my opinion that we have become way too dependent on credit scores these days.

Make credit decisions that work best for your financial household, not because FICO suggests doing it one way or another. In the long run, you’ll be better off for it.

Thanks again for being a reader, Emily. Best of luck knocking out that remaining debt. Write back and let us know when you are officially debt free.

Ask the readers: Have anything to add for Emily? Have you considered asking issuers to lower your credit limit, despite the impact on your FICO score? Feel free to share in the comments below.

Comments

  1. I’d only want my FICO high to get a good rate on a 15 year home mortgage. After that, I don’t see much point in even caring about a FICO score. We can save for a child’s education over time and buy a used with cash. What else would we really need a big loan for besides a home purchase? Some

    landlords do some shady stuff with FICO scores, like run the credit of everyone applying for an apartment, and picking the one with the highest score. I find this discriminatory (not sure if its illegal) and wastes the money of all apartment seekers. So, perhaps having a good score in this instance may give you an edge, but I personally would not want to give my money to a landlord that behaves like this.

  2. For the scores above 760, the credit “gods” want to see a credit utilization of 10% or less. Going from 10-30% won’t drop you below 760 but will keep you from going higher.

  3. First, Love the new site design. Great job. Way better than before.

    Second, Bank of America lowered mine automatically, because I was never going over 1000 dollars. I was pretty upset, because I knew my credit score would take a hit because of this.

  4. Every time they try to UP my limit, I call the credit card company to reverse it back to the original amount. I don’t want to be liable for for than I am comfortable with — ever! Me and my husband both pay the cards off in full every month (we have one each of the 2 major cards and they both offer rewards), if the purchase is a big one (like a mattress for example) we pay that card off with our much lower interest line of credit and attack it aggressively. My score is presently over almost 800 and my husband’s a little higher! I think the high score is because we actually do use credit frequently as an obsessively managed tool to take advantage of timely opportunities, but also pay it off reliably.
    By keeping a low available balance I can sleep better at night (especially if I just gave my card number over the internet!)

  5. I have lowered my credit limit before. However, the latest thinking is that it never helps and sometimes hurts your credit score/history. For those worried about being “liable” – federal law limits your liability to $50 for unauthorized charges. Since your credit limits are surely higher than $50, it doesn’t matter if the limit is $500, $5000, or $50000 – your liability doesn’t change. If the person you are worried about “attacking” your higher limit is yourself; well, then you’d have trouble staying under the 30% utilization anyways. There really is no reason to lower your limit and there is at least one reason to leave it high.

  6. Sorry, I think this problem may be more yours than the bank’s. It seems that you want to lower your limit to prevent yourself from overspending. That is a recipe for disaster. If you can’t trust yourself, how are you going to stay debt-free in the face of any future crisis? So much of managing your finances is mental control. This is just another aspect of FI you want to master.
    In my life, I have requested lower limits (when the numbers became ridiculously high-as in a year’s salary high) and had the bank lower my limit due to lack of activity. Neither mattered much in the long run. It’s like worrying about your interest rate on a credit card. As long as you know your due date, pay it off each month and have a fully-stocked emergency fund, who cares what the number is? It’s only imaginary. Just like your credit limit. Here’s an idea: just PRETEND the bank has lowered your limit. Then go out and live a happy, balanced, fulfilled life.

    • Great Dianes must think alike. I was pondering posting a similar thing…

      I have ridiculously high credit limits. I don’t get anywhere close to using them, even when I travel for work a lot and they get intensive use. I can no more imagine having a spending binge because I have a high limit than I can taking off all my clothes and walking naked down the median strip of a throughway. The credit limit is irrelevant to me. I see no point in lowering it. I have no liability from it being high, and in truth I don’t care what it is.

  7. Question, Chase turned me down for a card, said I had too many lines.
    I cancelled one (with them)just before applying and have 2 remaining with them (about 2,000 limit(s).

    Will lowering lines on 2-3 other cards (5,000 plus limits)with different banks help me get the Chase Card. Two free Flights are at stake. :)

  8. I did not realized your score could decline by lowering your credit limit. I wanted to lower my credit card limit myself mainly because I never would reach $10000 max and thought of lowering it to $5000. But after reading this post, I will keep my $10000 limit. Thanks.

  9. it makes sense in a way… the credit score is trying to measure self control. Still, do what you believe best for yourself. If you truly want the lower limit, go ahead and get it lowered, it is better to not have the worry about it then a perfect credit score.

  10. So…a few years ago I transferred a balance from a private student loan that had a variable rate (which at one point was up to 13.5%!!) to a credit card that had a fixed rate of 3.99% for the life of the balance. The original balance (and credit limit) was $21,500. I will pay off the balance this month. I have never used the card for purchases and do not plan to. Would it be best to keep the card open with a 21000 limit and never use it for anything, have the limit lowered, or simply close the account. My only interest in this is maintaining my FICO score for future mortgage loans.
    I also have another card with a $10000 that I haven’t used in 2 years. I no longer use any credit cards, ever. I have savings for “emergencies”.

  11. My mother is in her late 80′s and I manage her finances. She has an excellent FICO score, though will likely never need to borrow money again in her lifetime. She has a single credit card which she uses for most of her monthly expenses, and I pay it off in full each month. Her spending limit is $14,000. My brother thinks I should lower this (“in case someone accesses her credit and goes on a spending spree”). Is there any value in lowering the spending limit to $5000 or so, or should I leave as-is? I don’t believe she’s liable for fraudulent charges made to her card. Any input will be appreciated.

    Thanks.

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