Dear PGR,
Lowering the credit limit on a credit card could hurt your credit scores if it raises your credit utilization rate. Your credit utilization rate measures how the amount of your available credit (your credit limits) compares with the balances on your revolving credit accounts (typically credit cards). It's an important scoring factor, and a lower utilization rate can generally help you improve your credit.
You may be able to offset the impact by using your credit card less often—or by paying down a card's balance before the end of its statement period.
How to Calculate Your Utilization Rate
You can calculate your credit utilization ratio by dividing your credit card's balance by its credit limit. Credit scoring models use the balance amounts that have been reported to the credit bureaus and added to your credit reports, which is where you should look as well.
The balance you see on your credit report may be different from your account's current balance because credit card companies often send updates to the credit bureaus monthly—around the end of your statement period. This is also why you can have a high utilization rate even if you pay your bill in full each month, and why paying down your balance early may help your credit scores.
Figuring out your credit utilization rate for one credit card is a simple task—just divide the card's balance by its credit limit and multiply by 100 to convert to a percent. If you have more than one credit card, you'll add up the balances and credit limits on all your cards to find your overall credit utilization rate.
For example, if you have two credit cards with $5,000 limits, you have a total credit limit of $10,000. If one card has a $5,000 balance on your credit report and the other has a $0 balance, your overall utilization rate is 50%—$5,000 divided by $10,000.
If the limit on a card is lowered by $2,500 but the balance stays the same, your credit utilization rate would increase to 67% ($5,000 divided by $7,500)—which would likely hurt your credit score. However, if the credit limit on one of your cards increases by $2,500 and the balance stays the same, your credit utilization rate would decrease to 40% ($5,000 divided by $12,500).
Credit utilization rates can change throughout the month as your cards' reported balances and limits are updated. Keeping it under 30% is often suggested as a rule of thumb, but a low utilization rate (under 10%) is best for your scores. It's important to keep your utilization rates low on each card as well as overall.
How to Decide Whether to Decrease Your Credit Card Limit
Lowering the limit on a credit card might also make sense if you want to open another credit card from the same card issuer. Sometimes, a card issuer might limit the total available credit they'll extend to an individual. You also might want to lower your credit card limit to reduce your temptation to spend more money.
No matter the reason, lowering your credit limit likely won't be a good move for your credit score. If you're going to apply for an important loan, such as an auto loan or mortgage, you might want to hold off in case lowering the limit negatively impacts your credit utilization rate and scores.
The Bottom Line
There are few situations where lowering the credit limit on one of your credit cards is a good idea. If a card issuer does lower your credit limit, you may be able to offset the potential negative impact on your credit scores by using the card less often or paying down its balance early.
With an Experian account, you can easily check your overall credit usage as reported in your Experian credit report. You can also look into the details of each revolving credit account to see their utilization rates.
