There are a lot of factors that go into calculating a credit score. Following are some of the factors that affect your credit score:

• The number of loan accounts

• Types of loan accounts

• Outstanding debt

• Credit utilization ratio

• Length of credit history 

…and much more. All of the above factors play a major role in determining your credit score. Your credit score is seen as a direct indicator of your credit health. If you maintain a good track record that is backed by a solid credit score, lenders will look at you favourably and they will be very comfortable lending to you. It is important to practice healthy credit habits. 

It’s no surprise that there are a handful of confused consumers who have questions about what makes their score go up and down. A common question that leaves most people confused and searching for answers is: Will my credit score be affected in any way if I request a lower credit limit? What are the repercussions of requesting a lower credit limit?  Well, read on to learn more!

Lowering your credit limit on your cards increases your overall credit balance to credit limit ratio, which is also known as utilization rate. Credit utilization is one of the biggest factors that affect your credit score. It refers to the amount of your credit card balance as compared to the credit limit. It plays a major role in determining your credit score. It makes up for 30 percent of your credit score—hence you need to keep your credit utilization ratio low. 

Credit utilization is the amount of your available credit that is being used at the time that your score is calculated. The lower your utilization rate, the better your score is. The lower your utilization rate, the less risk you pose to lenders. An increase in your utilization rate is a sign of risk. If you have high utilization of your credit limit, it often means that you are using credit to spend more than you make. Therefore, it hurts your credit scores. A lower credit limit would increase your utilization ratio, thus leading lenders to see you as a risky customer.

How to calculate the credit utilization rate?

Your credit utilization is a simple ratio that you can easily calculate. You will need information regarding all your credit card limits and credit card balances. You can get this information by checking your most recent credit card statement. You can also call the toll-free customer service phone number of your credit card provider and speak to a customer care representative for this information.

Divide all the available credit card balance by the available credit limit. The result will be a decimal. Multiply that number by 100 to get a percentage. This results in your credit utilization expressed as a percentage. 

Now, having a healthy credit utilization ratio is important if you want to build and maintain a healthy credit score. If your credit utilization increases, conversely, your credit score will decrease. Since requesting for a lower credit limit would increase your credit utilization rate, it would indicate that you are credit “hungry”. It indicates that you are overspending and may not be able to pay your credit balance on time. Lenders view you as a risky candidate if your credit utilization ratio is high, as it puts you at a higher risk of defaulting on your payments. 

Now, for the million-dollar question—Should you decrease your credit card limit? Well, since decreasing your credit card limit increases your credit utilization ratio, you must consider a lot of things. Decreasing your credit card limit would mean having less access to immediate credit, so this might not bode well if you fall in a financial pickle. Consider your spending habits before arriving at a decision. 

If you are tempted to spend more just because you have a higher credit limit, then it would be wiser to request a lower credit limit. However, it is generally not recommended that you lower your credit limit. Following are a few points to keep in mind before asking for a lower credit limit: 

• Keep in mind that your credit utilization ratio accounts for about 30 percent of your credit score. By requesting for a lower credit card limit, you are essentially directly increasing your credit utilization ratio which will negatively impact your credit score. 

• Having a higher credit limit might actually help you out during times of unexpected financial distress. 

• Another reason to not decrease your credit card limit is that a decrease in credit limit has no positive impact on your credit score.

Consider the above points before applying for a credit limit decrease. 

When would asking for a lower credit limit make sense?

If you are tempted to spend credit just because you have access to it—well, it is time to ask for a decrease in your credit limit, despite what we’ve stated. When high credit limits become tempting and you can’t control your impulse to spend, you’re better off asking for a decrease in your credit limit. Cut the card and cut the cord! Eliminate any spending outside of your means. You will be surprised to know that many consumers actually request credit limit decreases in order to effectively save themselves from their own bad financial habits.

Addtional Reading: Your Credit Utilization Rate and How to Improve It

How will a credit limit decrease affect me?

After you have applied for a credit limit decrease and been approved for one, you may see an initial negative impact on your credit score. However, you will be minimizing any chances of spiralling into a financial rut because of credit card debt. It is unlikely that you will cause any serious damage to your credit score, provided you spend wisely and practice healthy credit habits. If you are considering lowering your credit limit, make sure to factor any planned purchases. Make sure that it doesn’t completely limit your spending power, especially if you rely on that card for emergencies.

If you request a credit card limit decrease, focus on paying down your credit card debt to lower your utilization and that will likely help improve your scores. While a credit limit decrease can ultimately affect your credit scores, the impact is neither guaranteed nor necessarily significant. Always remember, credit healthy toh credit wealthy! Be credit savvy and discover various loans and credit cards suitable to your needs!