Can Credit Limit Reduction Help Your Credit Score?

If your have poor credit history, you may want to consider reducing your total credit limit. This will prevent excessive credit from hurting your score. In addition, it can reduce your risk of getting into more debt in the long run.

Do note that reducing your credit limit can temporarily cause your debt-to-credit ratio to rise significantly. This means your credit score may take a dip in the short term.

However, if any of the following conditions apply to you, you should consider asking your banks to reduce the credit limits on your credit cards, credit lines, and other debts.

1) You can pay off a large portion of your existing outstanding credit balance quickly

As an example, say you have a credit limit of $5000 on your credit card with an outstanding balance of $4000. You want to reduce the credit limit to $2500 and carry a balance of $1250 or less. This means you need to pay off $2750 immediately before you can request the reduction.

If you can’t repay the $2750, getting your credit limit reduced can actually hurt you. You may want to wait until you have pay off a large portion of the outstanding balance before you request to reduce your limit.

2) You have a lot of credit.

It is quite common for an average consumer to have several types of debts and credit accounts. These include credit cards, store charge cards, a mortgage, a car loan, and a personal line of credit. Having too much credit can give the impression to lenders that you have a high risk of defaulting on your repayment. Thus, if you have credit accounts that you are not using, you should consider closing them. And if you are still servicing the debts from these accounts, try reducing their limit once you have significantly pay down the debts.

3) You have credit accounts that were opened many years ago

If you have credit accounts that were opened many years ago, you should try to keep them open. However, they are good candidates for credit limit reductions. Long term accounts with lower credit limits can work well for you to boost your credit score in the long run.

4) You are not expected to take up a loan soon.

Since reducing your credit limits may lower your credit score in the short term, you have to make sure you do not need a loan in the near future. If you decide to take a loan quickly after a credit limit reduction, you may not be able to get the best interest rate for your loan.

Even though a smaller limit can hurt your credit score in the short term, you should try to get that reduction done, as this step will made it harder for you to overextend your credit. In the long run, you credit score will likely rebound to a favorable level that quality you for better interest rates.

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