Does a Low Credit Limit Affect Your Credit?

While credit cards provide needed funds in a hurry, some people dont manage the use of the credit cards efficiently, running up to the maximum amount they can use. The amount of debt you have in relation to your credit limits has a significant impact on your credit scores, regardless of whether you have high or low credit lines. Bolster you your credit rating just by restricting the amounts you charge to your credit cards.

Credit Limits

The scoring models used to evaluate consumers' creditworthiness focus on the amount of credit people use more than the amount of credit they have. A low limit may even serve you well with some lenders. Some lenders consider unused portions of high credit lines as potential sources for large amounts of new debt. Therefore, high credit lines could work against consumers who have them. Lenders might approve those consumers loans, but they may pay higher interest rates due to a potential risk for debt accumulation.

Credit Card Balances

The amount of debt you have affects your FICO credit score, regardless of how low your credit limit is. The Fair Isaac Corporation created the FICO scoring model. Fair Isaac's "My FICO" website indicates that the "Amounts Owed" category of its scoring model impacts 30 percent of a credit score, and the category partly focuses on the proportion of your credit lines used. Paying down credit card balances and keeping them low is one of the most effective ways to improve your FICO score, according to Fair Isaac.

Reduced Credit Limits

Credit card companies can lower cardholders' credit limits at their discretion. Creditors may decrease cardholders' limits for several reasons, which include making late payments. Some creditors decrease limits to an amount equal to customers remaining balances. That can be particularly harmful to cardholders' credit scores, because it will appear to scoring models that customers make so many charges that they consume their entire credit line.

Credit Bureaus

Check your credit reports at the national credit-reporting companies, which are Equifax, Experian and TransUnion. Your credit limits on those companies' reports may not be up to date, especially if your limits have increased since you first opened your accounts. As a result, you may have lower scores because you appear to have less available credit than you do. Contact your creditors, and ask them to report your limits correctly if you find errors. Dispute such errors with the credit bureaus reporting them if your creditors don't correct them.