There are times when a bank can decide to lower your credit limit. Either because your credit score suddenly dropped or because you do not use the card often enough.
Some people, once they learn that their limit was lowered, start panicking. They are afraid that their credit score will be affected. Is that true? Will the lowered credit limit affect their credit score?
Credit limits do not affect your credit score directly
Credit limits are not one of the things factored into a Fico score. Someone can have just $300 credit limits on all their credit cards and still have the same good score as someone with a $50k credit limit.
What your credit limit is and how high it is has zero benefit or affect on your credit score.
Credit limits can affect your credit score indirectly
Even though credit limits do not directly affect your credit score they can indirectly affect your credit score. That’s because of credit utilization.
What is credit utilization?
30% of your Fico score is based on how high your credit utilization on your credit cards are.
Fico prefers to see that you do not use more than 9% of your available credit limit. The more percent of your credit limit you use the higher your credit utilization will be and the more your credit score will be affected.
So let's do the math
If you have a credit card with a $1,000 credit limit and swipe $300 every month on the card then your credit utilization stands at 30%. But if your credit limit was suddenly lowered to $300 and you still swipe the same $300 then now your credit utilization stands at 100% which is bad for your score.
So how do I fix that?
Based on what we explained above. In order to protect your credit score from falling if a bank lowered your credit limit, make sure your balance gets lowered as well. If you lower your balance on that card accordingly then your credit score will not be affected due to the credit limit decrease.
One more important point
This post only discussed the effect of your lower credit limit in regards to your Fico score.
There are other benefits that come along with having credit cards with high limits besides your credit score. Examples include getting approved for certain loans, or getting approved for higher credit limits, etc. For this, you will need to work on getting your credit limits back up, or at least replace the reduced limit with another credit card that has a high limit. We will leave it for another post to discuss how exactly that can be done. Stay tuned!