If you have a credit card, you should be familiar with what your credit limit is.
This figure is simply how much your card provider has agreed you can borrow.
Just how much this credit limit is depends on the type of credit card you have, your credit history, and how you’ve managed your spending and repayments on the card in the past.
Your lender is unlikely to lower your credit limit for you, but there may come a point where you feel like you want to ask for it to be reduced. There’s no reason why you shouldn’t be allowed to do this, but you may want to think carefully before doing so.
How much do you owe on the card?
There are many reasons you may want to lower your credit limit. Perhaps you want to remove some of the temptation to spend, or maybe you don’t use the card very often and want to lower the limit to reflect that.
Well, just whether or not it’s a good idea to ask your card provider to do this depends on how much you owe on the card, and how close you are to your current credit limit.
When you apply for a loan, mortgage or credit card, the lender may look at your credit card utilisation. This simply means how much you’ve borrowed on your credit card compared to the maximum amount you can borrow. So, if you have spent £250 on a credit card with a £1,000 credit limit, your utilisation would be 25%.
The lower, the better?
Generally, using a smaller percentage of the credit you have available to you is better in the eyes of a lender. Which means, by lowering your credit card limit, you may effectively be moving the posts closer to your balance, which means your utilisation would go up.
Confused? Let’s use the example from earlier. Imagine you have a £250 balance with a £1,000 credit limit, giving you 25% utilisation. If you reduced that credit limit to £500, your utilisation would now be 50%.
This means some lenders may judge your application more harshly, as you’re closer to your limit. Experian (one of the three credit reference agencies) recommends staying around the 25% mark of utilisation.
Unfortunately, it’s not all that straightforward.
Lenders judge you differently
The way lenders view your credit history is different, as each judges your application on different things.
While many lenders don’t like to see that you’re teetering at the top end of your credit limit, many also worry if you have large credit limits that you’re not using.
If you have a large credit limit on a card that you’re not using, or you’re very rarely using, some lenders might view this as a concern. This is because they want to reduce the risk that you’ll struggle to meet repayments when you borrow with them.
You might be an incredibly responsible borrower, but in a lender’s eyes, having all that credit available to you means, in theory, you could spend it all in one day and then struggle to make payments on your new credit card.
There’s no way of knowing how your future lenders will view this, so it’s a good idea to find a balance between the two. Try to keep your credit utilisation no more than around 25%, and avoid having cards with very large limits that you don’t use.
Offers to increase or decrease your limit
In some cases, your lender might contact you letting you know that they’re reducing your credit limit. This is very rare, and usually only happens if you haven’t been using the card.
If you do have a credit card you don’t use at all, you might want to think about cancelling it. To do this, give your credit card provider a call and ask to cancel your card. Once they’ve done this, you should cut it into small pieces and dispose of it.
However, it’s far more common for your lender to offer to increase your credit limit if you’ve borrowed responsibly. You don’t have to say yes, but if you’re happy to take on a little bit more, and you’re confident you can keep repaying on time every month, it may be useful to you.
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