Credit Cards – When You Should Reduce Your Credit Limit

When you apply for a credit card, a credit limit is determined by your creditor. This is evaluated on how risky they think it is to lend to you. Your income and your credit score are two major factors in determining your limit. You can increase your limit by calling into your institution and asking for the increase and the same goes for reducing your limit but at what point do you reduce your credit limit?

If you’re a compulsive shopper, it’s extremely beneficial for you to reduce your credit limit. If you are likely to continue to spend excessively then reducing your limit on your credit card will limit the damage you can cause to your finances. Reducing your credit limit is a great way to manage your spending but it also leaves you with no available credit should you need it in case of emergency so you should remember to be diligent. The focus should be on your outstanding debt and not on your available credit so it’s necessary to have a low credit limit and make all your monthly payments on time.

Credit card companies are very aware of how human psychology plays into our spending behaviour. Credit card companies make money when you are in debt so if you find that they are increasing your credit limit even after you have decreased the limit, don’t be fooled as this is a ploy to keep you in debt and having you pay as much interest as possible.

Does reducing my credit card limit hurt my credit score?

When you reduce your credit limit, this changes your credit utilization ratio which is the percentage of your credit limit that you’ve actually used so if your balance on your credit card is $300 and your credit limit is $1000 then your credit utilization ratio is 30%. This means that if your balance is $300 and you reduce your limit to $500 then your utilization ratio will jump and this will likely hurt your credit score. If you are responsible with your debt then it is wise to keep a high credit limit. If you spend money on a credit card because you have a high credit limit then you can help your credit score by reducing your credit limit. When your credit limit is low then your debt is more manageable. Missed payments and accounts in collection status can actually do more damage than a high utilization ratio.

Personal impulse is dangerous so if you don’t have the discipline then cut up those cards and close those accounts. For more valuable information and tips, visit http://www.prudentcreditrepair.ca