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The Importance of High Credit Card Limits

2008-08-15

Owners of high limit credit cards are proud of their status which speaks of the bank's favor and trust. Limit increase doesn't come by itself, sometimes it takes years of disciplined card use to prove the bank you've deserved it a better credit card deal. The day when you receive a statement offering to extend your credit line makes you happy and full of spending expectations.

But there some rare cases when a person, once offered an extended credit line, rejects the privilege. Or worse even, the person does accept the increased limit but later decides to lower it to the previous amount. The reason is put up simple: why borrow such a huge amount, when you are barely going to spend 20% of it?

The number of cardholders who keep their plastic for emergencies and know the importance of debt-to-limit ratio is still in the minority but they are companies' most trustworthy and valuable customers. Why do they then hurt their credit scores by lowering their $30,000 limit back to, say, $10, 000?

Do not think it's forbidden to ask the lender to reduce your available credit limit; it is just a matter of the damage extent of your credit. There are quite a number of reasons why its' important to keep your credit limit high.

If you are familiar with credit card debt ratio - the size of the outstanding balance compared to the limit available - the impulsive decision to reduce your credit line must be put off. To preserve a high credit score, your debt-to-limit ratio must stay within preferably 30%, which means if your current limit is $30,000 you should utilize no more than $9,000 to stay in good standing.

A lower credit utilization will not only keep your credit score but may raise it by several points. Assuming you have a $30,000 limit plastic with an outstanding balance of $9,000 and you decide to lower the limit to $10,000, you get the following picture: your debt-to-limit ratio rises from 30% to 90% (!) which indicates you've nearly maxed out the card.

The data will reflected in your credit report and will pull down your credit score. If you are still determined to lower your high credit limit, be ready to cut your expenses as well to keep the credit utilization ratio.

Another significant factor is the lender's opinion about your request. When an owner of a low APR, rewards plastic card asks to reduce the available funds, there must be big financial troubles and even stress in life. The potential risk increases and the lender's trust blows over.

The bank may not only reduce the limit as requested, but may take your credit card APR to the skies. You may face harder times with over credit providers as well. Doing a credit check and seeing such an instability accompanied by low credit scores, a new bank may offer you less favorable terms and small limit on a new credit card deal.

The question is, why reduce your credit line when it's enough to keep control of card spending? If you're not sure of the ability to do so, you can always put a monthly limit cap to avoid overspending.

You will not only preserve a good rating but will remain the bank's favorable customer with a high status.