If I lower my credit limits on my credit cards, does that lower my credit score? If so, why?
Lowering your credit limit can actually hurt your credit scores. The reason is that doing so increases your overall balance to limit ratio, or utilization rate. The lower your utilization rate, the less risk you represent to lenders. An increase in your utilization rate is a sign of risk because analysis has shown that consumers with high utilization are often using credit to spend more than they make and are more likely to default if they take on even more debt. Therefore, it hurts your credit scores.
How to Calculate Utilization Rate
To calculate your utilization rate add up all of your credit card balances and then add up all of your total credit limits. Divide the balance total by the limits total.
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 and the other a zero balance, your utilization rate is 50 percent — 5,000 divided by 10,000.
If the lender lowers the credit limit on the card with no balance by $2,500, you would then have a total credit limit of only $7,500. That would cause your utilization rate to jump to 67 percent — 5,000 divided by 7,500. That change creates a mathematical appearance that you have more debt, when in fact you've simply reduced the amount available to you.
Deciding Whether to Decrease Your Credit Card Limit
If you are reducing your credit limit because you find yourself tempted to charge too much on your credit cards, it may be worth a negative impact on your scores. Reducing the limits may help prevent greater credit problems in the future, which is far more important than a decline in your credit scores.
If you find that your scores are lower, focus on paying down your credit card debt to lower your utilization and that will likely help improve your scores.
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- The "Ask Experian" team