Editorial Policy

Tempted to Spend? When to Cut your Credit Limit

Erica Sandberg

May 4, 2012

QDear Erica,

I have a credit card with a $25,000 spending limit. I’ve had it for some time. Lately I find I’ve been using it more than I should, and now have $3,000 in debt. If I request my credit limit to be lowered to, say, $3,500, will this have a negative impact on my credit rating? — Dianne

ADear Dianne,

Halt! Do not reduce your charging limit. Not quite yet, anyway, as it most definitely will hurt your credit score. To understand why, you’ll need to know how such scores — FICO scores, specifically — work.Ask Erica

All credit scores are generated from the information on a credit report, but some of that data is weighted much more heavily than others. The most important factor is payment history, at 35 percent. Yet just below that at 30 percent is “amounts owed.” This section takes into account several factors, including your current debt on different types of credit products (like installment loans, lines of credit and mortgages) in relation to the amount you can borrow. For revolving credit instruments such as the credit card that you have, you never want to keep your balance at or near the limit. If you do, your credit rating will suffer.

Consequently, though you do owe a significant sum, you’re in a good scoring position because you still have the bulk of your credit line open on that card.

If having access to $22,000 is too tempting, rather than calling your creditor and asking to lower the line, consider first removing the card from your wallet. Still too close for comfort (because you know where it is and can grab it when you spot something awesome but unaffordable)? Pick up a pair of scissors and snip the plastic seductress into a thousand pieces. The account will remain active, but you certainly won’t be able to swipe it. That alone can cut down on impulse purchases.

After you have placed a healthy distance between you and the card, make a point of getting rid of the debt you have today. Review your budget to see how much you can promise as a fixed monthly payment. Then plug the numbers into an online debt repayment calculator to determine how long it will take to achieve a zero balance. For example, if you can manage to send about $525 every month and the interest rate on the account is 17 percent, you’ll be in the black in just six months.

When you owe nothing, go ahead and revisit the idea of a slimmer credit line. Maybe you’re right, and $3,500 or so is a far better borrowing amount for you. But before picking up the phone, make sure your proposed line is sufficient for your needs. Think ahead to what you may want to charge. Is a vacation in your future? Project for such costs as airfare, accommodations and a car rental. Or maybe you need a new laptop or other electronic thing or home appliance. Credit cards are ideal for these types of purchases because of the built-in consumer protections they offer. Total up what you think you may require as a credit line and ask for your new limit be at least twice that.

The issuer should be happy to comply with your request. Unlike increasing a credit limit, reducing it isn’t risky for them. As for what it will do to your credit score, a smaller credit line shouldn’t have an impact if you use the card but always pay off your bill in full. In fact, that’s what you should be doing — not just to have a high credit score but to avoid paying any finance fees.

Got a question for Erica? Send her an email.