Welcome to Ask Clark, a column designed to answer your financial questions, by money expert Clark Howard.
Will Losing Half My Credit Line on a Card Hurt My Credit Score?
Myron from Louisiana asks: "I have a credit card that I've had for over 20 years. The credit limit is $18,000. For the last seven years, I've not used it as much, maybe putting $400-$500 per month on the card. Before then, I would put around $4,000-$6,000 per month on the card. I've always paid the full balance each month.
“Today I received a letter from the bank saying they’ve noticed I’m spending way below the available line of credit, therefore they’re reducing the credit line from $18,000 to $9,000. Should I be concerned? My credit score has always been above 800. I don’t want anything to hurt it.”
Clark’s Take on Whether a Reduction of Your Credit Line Will Hurt Your Credit Score
Clark says: It's likely that your continued low usage of your available credit "set off alarm bells" with your issuer, who may see it as indicative of your financial health. The real issue here is how a reduction affects your credit utilization ratio.
Your credit utilization ratio is the amount of credit you’ve used versus the amount of credit available to you. You have a ratio for each credit card account in your name as well as for your overall credit portfolio.
“So if you have a number of other credit cards, and you’re keeping your utilization — the amount of your available credit — at or below 30%, and preferably if you’re above 800, your utilization likely is below 10%. As long as your ratios will stay in that general vicinity, this will not harm you any meaningful amount,” Clark says.
“On the other hand, if this reduction by your issuer, cutting your credit limit in half, reduces your overall available credit to a point where the amount of charging you do each month takes you above that 30% threshold, that will harm your credit score and standing a lot.”
How To Offset a Credit Limit Reduction
Clark says the way to offset a credit limit reduction is to open a new line of credit to replace what you’re losing.
“What I recommend is that you apply for a credit card somewhere else to bring more available credit into your life if you’re going to have a utilization issue with this reduction and limit coming into effect,” Clark says.
"There are a number of great no-annual fee cards that come with nice rewards for someone who's a net payer like you are and that's how you would counterbalance this reduction in your limit," he adds.
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