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Slashed line of credit
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.
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Thank you so much for the clarification. One of my two business credit cards had its limits slashed by 50% today and since all balances are paid in full, I wasn't sure how worried I should be.
I'm so grateful your answer popped up. It's a relief.
Thanks again!
Over the years, I've picked up various cards, mainly for points or rewards. My American Airlines Mastercard was acquired in 1991 as a freshman in college. Years and years of spending eventually yielded first class airline tickets to Las Vegas and to Italy on my honeymoon. Then it was a clothing store chain card where I got discounts on purchases, now I am racking up points with Amtrak Guest Rewards (love the Acela!).
Like the initial question, the card that I've had the longest recently reduced my credit line from $60,000 to $30,000. That's not a problem for me, I don't think I've ever put that kind of money onto a credit card and I have home equity lines that are similar in size at much lower rates if I ever actually needed the cash.
I haven't _needed_ that card for a long time, but I've kept it open because I've heard that reducing your open credit (or, I guess, bringing that utilization ration closer to 1) is bad for your credit.
Is there an optimum ratio? I'd rather drop some of these cards just to be on the safe side, but I am also on the verge of starting another business and potentially buying a house. I want to walk the line, but I don't know where it is!
-PAL
