Does Lowering Your Credit Limit Affect Your Credit Score?

If you have too high of credit limits on your credit cards that you don’t take advantage of, you might be wondering whether lowering your credit limit affects your credit score? We will discuss the answer to this question in much detail below.

Does Lowering Your Credit Limit Affect Your Credit Score?

Yes, lowering your credit limit can negatively affect your credit score because it may increase your credit utilization. Your credit utilization accounts for 35% of your credit score. Whenever your credit utilization increases, your credit score is negatively impacted. So, if you have a high credit limit, do not lower your credit lines for the best impact on your credit score. Of course, sometimes, credit limit decreases are not always in your hand as some card issuers may lower your credit limit without asking you.

Lowering your credit limit can negatively affect your credit score because doing so increases the amount of available credit you’re using. For example, if you have a $2,000 balance on your credit card that has a limit of $10,000, you’re utilizing 20% of your credit limit, which is good for your credit score.

However, if for example, you lower your credit limit to $5,000, you’re now utilizing 40% of your available credit, which will lower your credit score. As a rule of thumb, you want to keep your credit utilization below 10% and never to exceed 30%. In the example above, lowering your credit limit, increases your credit utilization, negatively affecting your credit score.

So, if you have a high credit limit and you leave a balance on your credit cards, do not lower your credit limit. It’s good to have a lot of available credit that you’re not utilizing because it lowers your credit utilization rate, which is good for your credit score.

Nevertheless, if you know that having a high credit limit tempts you to spend too much, you may benefit from lowering your credit limit to stop yourself from overspending. But, you should know that lowering your credit limit can potentially decrease your credit score, so please proceed with caution with before doing so.

Also, you should be aware that credit scoring models consider not only the credit limit and credit utilization of a single account, but look at the total credit limit of all of your credit cards. For example, if you have 3 credit cards, each with a $5,000 credit limit, credit scoring models look at your total credit limit of $15,000 and how much of your total credit you’re utilizing.

Who Decides What Your Credit Limit Is?

Your initial credit limit is determined by your income, your credit score, your payments history, and your creditworthiness. Typically, the better your credit score and the more income you have, the higher your credit limit will be. Credit card issuers typically review your account every 6 to 12 months. If you’re using your credit card frequently and you’re making your payments on time, your card issuer may raise your credit limit to give you room to spend money on the credit card.

However, if you’re not using your credit responsibly and you’re missing payments or making payments past the due date, your card issuer may lower your credit limit. If a card issuer reduces your credit limit, your credit score may be negatively impacted because doing so increases your credit utilization (how much of your available credit you’re using).

What Are Some Common Reasons For Lowering Your Credit Limit or Line of Credit?

Here are some common reasons why your card issuer may lower your credit line:

  1. Rare Use of Credit Card – If you have a credit card that you rarely use or charge only small amounts on, it should come as no surprise that your card issuer lowered your credit limit. Also, if your spending habits change drastically and suddenly, your card issuer may reduce your line of credit to limit their risk.

  2. Credit Score Drop – If you have a significant drop in your credit score, this could cause your lenders to lower your credit limit as a significant drop often signifies that something negative has been added to your credit reports, such as a missed payment, repossession, collection account, or other negative items.

  3. Missed Payment(s) – If you do not make at least your minimum payment on time, your card issuer may reduce your credit limit to limit its exposure. This is so because making late payments tells the lender that you’re going through financial difficulty that’s making it difficult for you to repay your debts on time. In this case, your card issuer may reduce your credit limit to stop you from racking up debt that you will be unable to pay back.

  4. Change in Income – Card issuers will periodically ask you to verify your income. If your income becomes lower, your card issuer may reduce your credit limit because you do not have sufficient income to make payments on your credit card.

  5. Tough Economic Times – In tough economic times, card issuers may lower the credit limits of many customers to protect themselves from borrowers who are likely to default on their debts. This is so because, during times of economic hardship, borrowers are likely to rely on their credit cards to get through tough times. The opposite is also true. During good economic times, lenders are likely to extend credit to borrowers because they pose little risk of default.

What Are Your Options If You’ve Had Your Credit Limit Lowered?

Here are some of your options if you’ve had your line of credit lowered or decreased:

  1. Contact Your Card Issuer – If you’ve had your credit limit decreased, you should contact your card issuer or bank and ask them for the reason they lowered your line of credit. Ask them if it’s possible to have your previous (higher) credit limit reinstated. If your card issuer refuses to reinstate your previous credit limit, ask them why it is lowered and work on improving the area that caused your credit limit to be lowered.

  2. Reduce Your Balances – Oftentimes, if your credit utilization (how much of your available credit you’re using) is too high, your card issuer may lower your credit limit to stop you from charging too much to keep your payments manageable. If this happens to you, reduces your credit utilization by paying down the balances on your credit cards. Reducing your balances will also improve your credit score as your credit utilization accounts for 30% of your credit score. The lower your balances, the better your credit score will be. Additionally, paying down your balances could save you a significant amount of money paid in interest on the balances. So, paying down balances is a win-win situation for most.

  3. Credit Limit Increase On a Different Card – If you’ve had your line of credit decreased, you should try asking a different card issuer to increase your credit limit. Increasing your overall credit limit helps your credit score.

  4. Apply For a New Credit Card – If you’ve had your credit limit lowered, and you want to increase your credit limit, you can always apply for and open a new credit card. Opening a new credit card adds to your total credit limits, boosting your credit score. Of course, opening a new credit card requires a credit check in most cases and results in a hard inquiry being added to your credit report. So, only apply for a credit card that you’re reasonably likely to be approved for.

Can You Anticipate When Your Card Issuer May Lower Your Credit Limit?

It is very difficult to tell when a card issuer or lender will lower your credit score. Oftentimes, it happens suddenly, and you will only know that your credit limit has been lowered after receiving a letter from your card issuer informing you that your credit limit has been decreased. A credit limit decrease can raise your credit utilization and therefore lower your credit score. Card issuers can raise or decrease your credit limit as they see fit, curbing your spending power when they see fit. Most often, credit limit decreases are performed when card issuers feel that a cardholder is seen as too risky to lend money to. Also, in tough economic times, banks may decrease your credit limit to limit their exposure amid economic uncertainty.

Here are some common reasons your card issuer may have lowered your credit limit:

  1. Your spending habits have changed, making you a risky borrower
  2. Your credit score has significantly changed
  3. There is new negative information on your credit report
  4. You’ve become the victim of identity theft

Frequently Asked Questions (FAQs)

1. Is it a good idea to reduce your credit limit?

It’s almost never a good idea to reduce your credit limit because the higher your credit limit, the less credit utilization you will have. The less credit utilization you have, the better your credit score will be. So, if you have a high credit limit, you should not reduce it.

2. Does having a high credit limit affect your credit score?

Having a high credit limit can affect your credit score, but it really depends on whether you leave balances on your credit cards. If you leave a balance on your credit cards, having a high credit limit will positive affect your credit score because it decreases your credit utilization (how much of your available credit you’re using). The lower your credit utilization, the better your credit score will be.

3. How can I raise my credit score?

You can raise your credit score by making all of your payments on time, reducing the balances on your accounts, refraining from submitting too many credit card or loan applications, keeping old accounts in good standing open, and avoiding having negative items from being added to your credit report.

4. Should I reduce my high credit limit if I don’t use it?

Even if you have a high credit limit, you should not reduce it. This is so because the higher your credit limit, the less your credit utilization will be. So, if you leave a balance on your credit cards, you will benefit greatly from having a high credit limit.