Many people want to raise their credit limit on their credit card so that they have more money available to them. However, there are times when lowering your credit limit could be a good idea. If you are thinking about lowering your credit limit, you will first need to understand how this will impact your credit score. You may be wondering, “Will lowering my credit limit hurt my credit score?”
The Argument for Lowering Your Limit
Most people lower their credit limit to avoid temptation. Since they know they will overspend if they have the funds available, they lower their limit so there is a cap on their spending. Often, people make this decision after they pay off a series of high debts. If your credit limit is higher than the amount you can pay back, you may consider lowering it.
You may also wish to lower your credit limit if you are adding someone to your account. For example, if you are about to give your teenage son a credit card for emergencies, you may want to limit him to something small, such as $500. Otherwise, you may end up with a massive bill from an irresponsible shopping spree. If your spouse has a spending problem, and you’re adding him to your card, you may want to lower your limit to keep his shopping in check.
Effect on Credit Score
It is possible that lowering your credit limit will have a negative impact on your score. A significant factor in determining your credit score is your credit utilization ratio. This is the amount of debt you are carrying compared to your available credit. If you lower your credit card limit, this percentage will increase.
Let’s say you have three credit cards, and each has a credit limit of $2,000. You have spent $500 on each card, so there is $1,500 free on each account. Since you are only using $1,500 of an available $6,000, your credit utilization is 25%, which is very acceptable. However, if you lower the limit on each card by $500, you will be using $1,500 of $4,500, which raises your credit utilization to 33%. The goal is to keep your credit utilization at 30% or lower. Anything higher than that may decrease your credit score. Thus, in this example, lowering your credit limit will damage your credit rating.
Alternatives to Consider
If you do not want your credit score to take a hit by lowering your credit card limit, you do have some other options. You can put a block or a limit on a card for a specific store where you often overspend. Let’s say every time you walk into Target, you spend $300 more than you had intended. You can contact your credit card company and ask them to limit the amount you can charge at Target, so your card will be declined if you try to spend more. Most card issuers will accommodate your request.
If you do not yet have a credit card, apply for one that will give you a low credit limit in the beginning. Then, the amount you can spend is limited. If you already have a card, pay off any balances before you lower the limit. That way, the decreased limit will not impact your credit utilization.
While lowering your credit limit may not be the best plan for everyone, it can work well for some. While it could lead to a decrease in your credit score, it could be a positive way to limit your spending, which could be the most financially prudent option.