Are There Reasons to Lower Your Credit Card Limits?

When it comes to credit scores, you may already know that it is a good idea to keep a high credit limit.

Sure:

A high credit limit also means that you can spend more on your credit card.

On the other hand, you might wonder if it a lower credit limit is such a bad thing because you might not necessarily want that temptation to borrow more than you need or can afford.

So, does it ever make sense to lower your credit card limit?

Generally, no.

Why You Shouldn't

Put simply:

There is aren't any major benefits that result from lowering your credit card limits.

While you cannot control whether your card issuers will automatically lower your limit for some reason, it does not make sense to request a credit limit decrease. 

The most obvious reason for this is that reducing your credit limit reduces your spending flexibility.

For example, if your card’s credit limit is $2,000 and you request that it be decreased to $1,000, you’re now able to spend just half as much using the card before you have to pay it off.

This is especially onerous if you’re making a large purchase that costs more than $1,000 such as a vacation package or expensive electronics.

Having a higher credit limit makes it easier to make large purchases and lets you avoid making multiple card payments each month just so you can continue using the card.

The bigger reason you should avoid reducing your credit limit:

It can have a negative impact on your credit score.

Generally speaking:

The higher your credit limits across all of your cards, the better it will be for your credit score.

Your Credit Score

To understand how your credit limits can affect your credit score, you have to understand how credit score work.

Your FICO credit score (used by most U.S. lenders) is a number that ranges from 300 to 850.

Higher numbers are better, with any number over 750 considered excellent and anything under 560 is considered very bad. To qualify for most loans and credit cards, you want to maintain a credit score of at least 700, which is considered good credit.

Your credit score is calculated using five factors.

As you can see:

The second most important factor of your credit score is the amount that you owe.

It can be split into two parts.

Amounts owed

The first part of the amount owed portion of your credit score is simply the amount that you owe.

The higher the total balance of all of your debts and credit cards, the lower your credit score will be.

Think about things from a lender’s perspective:

People who owe more money may signal that they don't have enough money so they have to borrow.

Credit limits

The other sub-factor is closely tied to your credit card’s credit limits, which is why decreasing them can lead to a drop in your score.

Your card’s credit limits impact your credit score by affecting what is called your credit utilization ratio.

It is a measure of the portion of your credit limits that is being used.

You can calculate it by dividing your current credit card balances by your current credit card limits.

So, if you have a balance of $200 and a limit of $1,000, your utilization ratio is 20%.

Your credit utilization ratio is used by lenders to assess your financial situation and ability to handle new debt.

If someone is maxing out their cards and has a utilization ratio near 100%, that clearly indicates that they’re having money trouble and might not be able to pay back a new loan.

A low utilization ratio indicates that the person is financially stable and could handle a new monthly payment.

The lower this ratio, the better that it will be for your credit score. Experts recommend keeping your credit utilization at no more than 30%.

Reducing your credit limits while maintaining the same balance will increase your utilization ratio, which will decrease your credit score.

Even if you never use your full credit limit, having a high credit limit keeps your utilization low, even if you rack up a large balance.

That’s why having a higher credit limit is almost always advantageous.

When It Might Make Sense

Even though reducing your credit card limits will have a negative impact on your credit score, there are some niche situations where it can make sense.

Fear of falling into debt

One thing that is clearly worse than having a poor credit score is being in debt.

Out of all types of debt, credit card debt is among the worse.

The interest rates on credit cards are incredibly high when compared to other loans, often exceeding 20%, which can make even a reasonable purchase incredibly expensive.

Having a lower credit limit means that you can’t fall as deep into debt if you use your credit card when you shouldn’t.

It can be easy to fall into the trap of using your card to buy something now and worrying about how to pay for it later.

You could reduce your credit limit to a level where it simply isn’t possible for you to spend more than you can afford to pay off.

This is a good way to ensure that you don’t wind up in expensive credit card debt.

However, you should also consider whether you might be better off without a credit card if you’re so worried about having trouble paying your card balance in full every month.

Debit cards offer many of the benefits that credit cards do but don’t allow you to spend more money than you have.

They completely eliminate the risk of falling into credit card debt, which might be better for your peace of mind overall.

Shifting limits to a new card

Another uncommon situation where reducing a credit limit might make sense is when you’re applying for a new credit card from an issuer who has already given you a card.

When you apply for a credit card or any loan, the lender primarily cares about whether you can afford the loan and whether you’ll pay the money back.

Credit card limits function as a risk limiter for card issuers.

If you’re on the hunt for credit card rewards, there’s a good chance that you’ll be interested in carrying multiple credit cards.

Different cards offer different rewards for purchases in different categories. That means that carrying multiple cards can help you maximize your card rewards.

If you want to apply for multiple cards from one card issuer, you might have to voluntarily reduce your credit limit on one card to get approved for the second.

Hypothetically, if a card issuer doesn't want you to have a combined card limit of more than $30,000.

But, you already have a credit card from that issuer with a $30,000 limit. If you apply for another card that same issuer, you may be rejected automatically -- even if you are a qualified applicant.

Instead, you might have to reduce your credit limit on the first card in order to get approved for the second card.

If you already have two cards from the same issuer, you can also move limits from one card to another if you find yourself using one card more heavily.

Usually, you can simply contact the lender’s customer support to ask that the credit limit is moved.

Conclusion

Having a high credit limit is good for multiple reasons.

It lets you spend more using your credit card without having to worry about hitting your limit before the end of the month.

It also is good for your credit score.

There’s not much reason to consider reducing your credit limits.

Instead, you should do your best to increase your limits when possible and make sure that you only spend within your ability to pay.