Will Lowering My Credit Limit Hurt My Credit Score?

Will Lowering My Credit Limit Hurt My Credit Score?

February 3, 2014         Written By Bill Hardekopf

Most people want to raise their credit limit on their credit card in order to have more money available to them, but there are situations in which lowering your limit is a better option. If you are considering doing that in the near future, you need to understand the impact your actions will have on your credit score. You may be asking yourself, “Will lowering my credit limit hurt my credit score?”

Reasons to Lower Your Credit Limit

Why would you want to lower your credit limit? For most people, it’s a matter of self-control. They know they will overspend if they have the money available, so they do what they can to put a cap on their available funds. This may come about after a series of high debts that were hard for the person to pay back. If you know that your credit limit is higher than what you could realistically pay back, you might want to lower it.

You could also lower your credit limit if you were going to add someone onto your account. For instance, if you are going to give your teenager a credit card for emergency funds, you might want to limit the amount of credit to, say, $500. Otherwise, you run the risk of having a huge credit card bill from a random shopping spree. If you are adding your spouse who happens to have a spending problem, lowering your limit might be the only way you can keep his or her shopping in check.

Will This Hurt My Credit Score?

In theory, lowering your credit card limit can have a negative impact on your credit score. A large portion of your score is comprised of your credit utilization percentage. This is the ratio of debt you are carrying compared to the amount of credit you have available. If you lower the limit, the percentage is going to increase.

As an example, let’s say you have three credit cards, each with a $2,000 credit limit. You have spent $500 on each card. $1,500 out of the total $6,000 available means that you have a credit utilization of 25%. If you lower the limit on each card to $500, you end up using $1,500 out of a possible $4,500. That makes your credit utilization 33%.

Ideally, you want to keep your credit utilization at 30% or lower. Anything beyond that will start to decrease your credit score. So, in this example, simply lowering the credit limit can damage your score, depending on the balance you are carrying.

Alternatives to Lowering Your Credit Limit

If you don’t want to hurt your credit score by lowering your credit limit, you could try putting a block or limit on the card for a specific store where you often shop. For instance, let’s say you know you have a sweet spot for Michael’s, the craft store. Every time you go there, you spend $200 more than what you wanted to spend. You could talk to your credit card company about limiting the amount of money you can charge at Michael’s so that your card will be declined if you overspend. Most issuers will be able to accommodate you.

If you do not have a credit card yet, try to apply for one that will initially give you a low credit limit. You are then restricted on the amount you can spend. If you already have a credit card, pay off the balance you have on it before you lower the limit. Hence, the lower limit will not significantly impact your credit utilization.

Lowering your credit limit may not be for everyone, but it can work well for some people. It may lead to a drop in your credit score, but it can be a good thing to do in order to limit the spending on your card. And that may be a very financially prudent thing to do.

The information contained within this article was accurate as of February 3, 2014. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.


About Bill Hardekopf

Bill Hardekopf is the CEO of LowCards.com and covers the credit card industry from all perspectives. Bill has been involved with personal finance for over 15 years. He is a frequent contributor to Forbes, The Street and The Christian Science Monitor.
View all posts by Bill Hardekopf
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