Question: My credit card company recently reduced my credit limit by $8000 despite the fact that I've never had a late payment and I normally pay off the balance in full at the end of every month. I'm concerned that despite my perfect credit history with this card, my overall credit score will be affected by this seemingly spontaneous adjustment in credit limit by the company. James, Newton, MA
Answer: Like millions of other folks, its possible that you credit score has been dinged when your credit issuer cut your credit limit through no fault of your own. However, since you don't carry a balance there should be little to no effect. What's more, the biggest impact on your credit score is your bill paying history. The more you make your debt payments on time and over time the better your credit score.
The impact of a lower credit limit comes from a recalculation of your "credit utilization ratio". This ratio looks at your total used credit compared to your total available credit. A higher ratio is a negative in figuring out your credit score. So, let's say someone was carrying a total balance of $4000 and they had total credit limit of $20,000. Suddenly, their credit limit is slashed by $8,000 to $12,000. The credit utilization ratio has gone up and their credit score has gone down.
Again, there may be some timing issues when your credit score is calculated, but if you don't carry a balance the effect of a lower credit limit should range from none to limited--and eventually fade. No matter what, the key to a good credit score over time is paying the bills when they're due and critical to your financial health is not carrying credit card balance.