Do Credit Line Reductions Affect Credit Score?

Even if you always pay your bills on time, your credit card company may lower your credit limit when they are looking for ways to minimize risk. Carrying a balance is particularly harmful when creditors are tightening their belts, so you must be aware of both making on-time payments and keeping your balances low, or eliminating them completely. If you do end up with a reduced credit limit, don't panic -- you may be able to revive your utilization ratio by making up the gap with new credit.

Credit Utilization Ratio

Roughly one-third of your credit score is determined by your credit utilization ratio, or the amount of credit you're using in relationship to the amount of credit available to you, according to Smart Money writer AnnaMaria Andriotis. Financial experts recommend keeping balances of no more than 30 percent of your available credit to keep your credit score healthy. When your credit limit drops, your credit utilization ratio increases, which reflects poorly on your credit score.

Solutions

Although you may be frustrated with your credit card company after having your credit limit dropped, it's not wise to cancel your credit card because doing so will further damage your credit utilization ratio. Instead, shop around for a better offer from a different credit card company and consider transferring some or all of your balance to keep your utilization below 30 percent on each account. By opening a new account, you may be able to regain the credit you had prior to the limit reduction. You may also call your creditor to ask for the limit reduction to be reversed.

Credit Report

Credit card companies are required to alert you if your credit limit has been reduced; however, you should still check your credit report to make sure that no sneaky limit reductions are weighing on your credit score. Each year, you are entitled to a free copy of your credit card from each of the three major credit bureaus through the Annual Credit Report website. Review your credit report also for any discrepancies that may have caused your creditors to lower your limits -- you may be able to dispute the reduction if you find errors in the report.

Considerations

The best way to prevent yourself from credit limit reductions is to keep your credit score healthy and your credit utilization low. Create a budget by comparing your spending with your income and making adjustments to contribute more to your debt each month. In a Smart Money article, certified financial planner Sheryl Garrett recommends looking for a part-time job to pay off your debt more quickly.

Warning

Increasing your credit limit is not always beneficial. According to CNN Money, those who may be tempted to spend more should not risk increasing their debt by asking for a higher credit score. In addition, lenders may see high credit limits as your potential to get into debt, even if you don't intend to use them. As a result, having very high credit limits may be limiting when you apply for a mortgage or car loan.