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Decreasing Your Credit Limit
 Jun 24, 2009

Is It a Good Idea to Decrease Your Credit Limit? This article has information on why decreasing your credit limit can hurt you, when it is a good idea to decrease your credit limit, and what to do if your credit card issuer decreases your credit limit.

Many people are considering their financial situations and determining that it is wise to have less credit. They pay down their debt, and then ask for a credit line decrease on some or all of their cards. They think that they are helping their financial situation by removing some of the temptation to use more debt, but in reality, when you decrease your credit limit, you may be hurting yourself by what happens to your credit score.

Why it can hurt to decrease your credit limit

One of the most important aspects of your credit score is a measure of how much of your available credit you are using. When you are using less than 30% of your available credit, that is the best. Your credit score starts to really take a hit when you are using more than 50% of your available credit. If you decrease your credit limit, you run the risk of suddenly changing your credit picture. Here is an example:

You have three credit cards that you have been paying down:

  • Card #1: Limit = $2,500. Paid off.
  • Card #2: Limit = $2,200. Still owe $1,000.
  • Card #3: Limit = $1,800. Still owe $1,600.

In this scenario, you have paid of credit card #1, and are using a debt plan to pay off the other two. Right now, you have a total credit limit of $6,500. You are using up $1,600 of it, or 25%. Your credit score actually shouldn't be too bad (although you do get some negative reaction due to how close Card #3 is to the limit). But, what happens if you celebrate paying off Card #1 by cancelling it? Suddenly you have a total credit limit of $4,000, and you are taking up 40% of your available credit. Such a change can be devastating to your credit score.

Even asking for a credit limit reduction on your card can reflect negatively on you. Such requests are documented and reported on your credit report, where they will affect your overall credit score. It is especially dangerous to your score if your credit line is decreased to something that is within $200 or $300 of your current balance.

When it might be a good idea to decrease your credit limit

There are times, though, when you might want to decrease your credit limit. If you have a very high limit for your income, or if you rarely use even 30% of your available credit, you might want to reduce your limit in order present a more balanced financial picture. Too much available credit even (maybe even especially) credit that you are not using can be detrimental to your credit score. This case is a rare one, though. The chances of you being in a position where it will help you to decrease your credit limit are slim. If want to decrease your credit limit because you are afraid of the temptation to use your credit recklessly, freeze your credit card in a block of ice, put in a safe place or cut it up (but don't cancel the account). However, you should realize that these days credit card issuers might cancel your account altogether if you do not use credit on a regular basis.

What to do if your issuer decreases your credit limit

Sadly, there is very little recourse if your credit issuer decides, for whatever reason, to decrease your credit limit. The first thing you should do is figure out how close you are to limit right now, and whether any automatic payments used making your card will tip you over, triggering fees and an increased interest rate. You will need to make a hefty payment to clear up room between your balance and your new limit if this is the case.

One of your best defenses is to open a new credit card account when this happens, giving you a new line of credit that can raise your overall available credit. You should apply quickly, though, before the decreased credit limit catches up with you (30 to 60 days) and you end up a lower credit score and possibly end up denied for the new credit line. This will give you a little breathing space. You should also consider paying down more of your debt if you can, bringing your usage of available credit to 30% or less.

Whatever you do, though, you should not cancel the offending credit card. Paying down the balance (which will help) and then cancelling the card will only result in even less available credit, hurting your score further. Do not cancel the offending card (especially if it is a long-standing account) until you have a solid card with a higher limit in place.

Related Article: Understanding Your Credit >>

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