Is It the Right Choice to Reduce Credit Limits to Increase Credit Scores?

Improving your credit score is a good idea, but in most cases, reducing your credit limits is not the way to accomplish this. In fact, reducing your credit limits can actually hurt your credit scores significantly. There is no easy fix for improving your credit; it takes time and good management to improve your scores.

Credit Score Factors

Your lines of credit, credit limits and payment history all factor into your credit score. Your credit limits themselves do not raise or lower your scores. Late payments, missed payments and how close you are to your limits do factor into your score. Withdrawals exceeding your available credit also damage your score. In addition to these factors, the length of your credit history, new credit accounts and the types of accounts you have all affect your credit score.

The Importance of Percentages

One of the top factors in your credit score is how much of your available credit you use. For a good score, your debt should be less than 30 percent of your available credit. This means that if you have $10,000 of available credit, you should have less than $3,000 in debt. If you reduce your credit limit to $5,000, that 30 percent limit reduces to $1,500. If you have $2,500 in debt on a $10,000 credit card, this portion of your credit score is in good shape because you are only using 25 percent of your available credit. Reducing your credit limit to $5,000 will damage your score because even without any additional debt, you are now using 50 percent of your available credit.

Effects of Limit Reduction

Reducing your credit limits is only a good idea if you are not carrying debt and want to limit your future potential to get into debt. This is a choice to impose psychological spending limits on yourself and back them with monetary limits. However, your available credit from all sources is calculated together from your score. This means that if you are under the 30 percent limit on all of your credit accounts and choose to lower limits on one account, it can still push your general percentage of debt higher. For example, imagine you have three cards with $10,000 limits and carry a balance of $3,000 on two of them and a balance of $2,000 on the third. Your total credit available is $30,000 and your total credit used is $8,000 or just under 27 percent, which is a good score. Then you reduce the limit on your lowest-balance card to $5,000. Your credit usage percentage is pushed up to 32 percent, even though you still have $17,000 in available credit. For this reason, wait until all of your debt is paid off before reducing limits on any account.

Considerations

The amount you owe is the second-largest factor in your credit score. The largest is whether your payments are on time, accounting for 35 percent of your score. The amount owed calculation accounts for 30 percent of your score, but there are other factors as well as the straight percentage, including how much of the original balance is paid off and which types of accounts carry balances. To increase your credit score, focus first on paying all bills on time and second on reducing consumer debt balances such as credit cards. Don't worry about reducing mortgage debt until after credit card balances are down, as a mortgage generally carries less negative score weight as well as lower interest rates than consumer credit cards.