CC Limits

[amberbamber]

Ok I've paid off two of our 3 CC's now.
The first one has a limit of $7500.
The second one has a limit of $10000.
Should I call and ask them to bring the limits down, to like half? Or should I just leave them where they are?

Isn't it bad to have so much credit not used? And we are only charging one thing for $24.99 a month on one of them and that will get paid off every month.

What do you think?

[JanH]

I wonder about high limits, too. Someone once told me they are not a good thing to have for credit reports. But I never knew if that was true. I would be interested in knowing, also.

[PRICEPLUS]

Pay off your cards and leave it be. That is my .02 cents. You are doing great keep it up and you'll soon be financially secure! Way to go!

[sweeps]

It's good to have high limits from a credit score perspective. However, if the high limit makes it too tempting to rack up debt, then definitely lower your limits.

[amberbamber]

No, honestly I can say I will never- ever use them again.

[tinapbeana]

personally i would leave the limits as they are: you never know when it might come in handy for an emergency. plus (and i am actually being serious here) i think it would be really satisfying to pay for a used car with a credit card and then pay the card the next week... especially if you earn points!!

[safari]

From what I read, the bigger the limits the better, because it lowers your used credit ratio. I have a credit card with $42K credit limit, and I charge to it less than $20 a month and always pay the balance in full. If I add all my credit cards, the total credit limit is well over $100K, but I never carry a balance and have a high credit score. I don't think that asking your bank to lower your credit limit will improve your credit score, most likely it will have the opposite effect.

[sakigt]

Originally Posted by safari

From what I read, the bigger the limits the better, because it lowers your used credit ratio. I have a credit card with $42K credit limit, and I charge to it less than $20 a month and always pay the balance in full. If I add all my credit cards, the total credit limit is well over $100K, but I never carry a balance and have a high credit score. I don't think that asking your bank to lower your credit limit will improve your credit score, most likely it will have the opposite effect.

Safari is right. Lower debt/credit ratio is better for your credit score.

Say you have $10,000 combined limit, and have a $1,000 balance

1,000/10,000 = 10%

Say you drop your limit to $5,000

1,000/5,000 = 50%

The lower the percentage, the better off you are.

[Ima saver]

I agree with the others, keep your limits high but pay off the balance every month.

[Bookie]

1,000/5,000 = 50%

I think I want a recount.

[Ima saver]

Looks like 20% to me, bookie!

[poundwise]

The sentiment expressed in the comments above is accurate... to a point.

Having high limits absolutely does not hurt you in terms of your credit report(s) and FICO score. It can, in fact, help in this regard as mentioned above, because of the potential of improving your credit ratio.

However, in terms of obtaining a loan, such as a home mortgage, having those high limits will, in fact, hurt you. Unlike your credit score, which is a measure of how you handle your credit, including how much credit is used compared to how much is available, a mortgage lender will view unused, high credit limit accounts as potential debt. Most lenders actually count it as debt for certain purposes.

If you are considering a new home purchase or refinance in the near future, lowering your limits would be a good idea.

Otherwise, there is no reason to do so unless you just want to. If you would prefer to lower your limits, then by all means do so, it will also not hurt, to any real extent, to lower them seeing as how you do not charge anything, or very little, to the accounts anyway.

[amberbamber]

Originally Posted by poundwise

The sentiment expressed in the comments above is accurate... to a point.

Having high limits absolutely does not hurt you in terms of your credit report(s) and FICO score. It can, in fact, help in this regard as mentioned above, because of the potential of improving your credit ratio.

However, in terms of obtaining a loan, such as a home mortgage, having those high limits will, in fact, hurt you. Unlike your credit score, which is a measure of how you handle your credit, including how much credit is used compared to how much is available, a mortgage lender will view unused, high credit limit accounts as potential debt. Most lenders actually count it as debt for certain purposes.

If you are considering a new home purchase or refinance in the near future, lowering your limits would be a good idea.

Otherwise, there is no reason to do so unless you just want to. If you would prefer to lower your limits, then by all means do so, it will also not hurt, to any real extent, to lower them seeing as how you do not charge anything, or very little, to the accounts anyway.

Actually we plan to build a home in the next 2-4 years. So- based on what you're saying, it would probably be wise to lower them in the next year or so, correct?

[greedy4chips]

Originally Posted by amberbamber

Actually we plan to build a home in the next 2-4 years. So- based on what you're saying, it would probably be wise to lower them in the next year or so, correct?

You don't have enough open limit for it to matter that much in my opinion. We have almost twice the value of our mortgage in open CC limits when we bought our house and our scores were still in the 780's.

[poundwise]

Originally Posted by amberbamber

Actually we plan to build a home in the next 2-4 years. So- based on what you're saying, it would probably be wise to lower them in the next year or so, correct?

Originally Posted by greedy4chips

You don't have enough open limit for it to matter that much in my opinion. We have almost twice the value of our mortgage in open CC limits when we bought our house and our scores were still in the 780's.

Your score, while a significant factor in any loan situation, doesn't have much (if anything) to do with a lender's view of debt and the potential for a loan and/or rate.

You may have been able to purchase a home, and you may have even received a good rate (though it may have very well been better if you didn't those outstanding high limits), however, it is a fact that virtually every mortgage lender views unused, open lines of credit, as potential debt and that counts in their assessment of you for a loan.

Just as there seem to be very little in way of absolutes for credit scoring, I am sure that this rule doesn't seem to make sense or apply to certain persons, lenders, and situations. However, that fact, should it pertain to your situation, doesn't make it less true.

If a person is going into a situation where they are going to buy a house, it would be wise for them to consider lowering the available credit limit since it is a factor in determining whether or not they qualify and/or qualify for a certain rate.

I can also tell you why this may not matter. I'm going to use simplified numbers for the example. I'm also going to use a single person, again, for simplicity's sake.

Let us say a person makes $100,000 a year. This same person has 4 credit cards, each with a $5,000 limit. This person does not pay interest because they pay the balance in full each cycle. At any given time, one of the cards may have as much as $1,000 charged to it and two others may have $500 each. The fourth card is hardly used.

In this case, the person has a total of $20,000 available credit. They have a maximum potential utilization ratio of 10% because the most, of their available, that they use at any given time is $2,000. This factor, in terms of their score, is very good.

When they go to get a mortgage, the lender does not see $2,000 as being of any significance at all. The lender sees $20,000 as potential debt. If we assume the borrower has no other debt -- vehicles are paid for, no outstanding loans or other debts -- then $20,000 figures very favorably against a $100,000 a year income. The debt to income ratio (different than the credit utilization ratio) in this situation is 20%.

So, this person is in fine shape as is. Nothing needs to be done. Provided other elements of the credit report are in line (payment history, etc) this person is in a good position to obtain a loan at the best rate.

However, if the same person were to also have an outstanding car debt ($10,000/$350 monthly payment), student loan ($15,000/$180 monthly payment), bank loan/previous line of credit still owing ($2,500/$75 monthly), and assume this person makes $60,000 instead of $100,000, then you have an issue. The person has, with the $20,000 of potential debt from their open limits on their credit cards, too much debt (and/or potential debt) for the ideal. Paying off the student loan would be great, however, if that's not possible (likely, leading up to buying a home) then closing the cards is the best way to 'adjust' the debt (potential) to income ratio.

Going back to the original assumptions on our imaginary person. He has a credit utilization ratio of 10% and a debit to income ratio of 20%. If he then closed two of credit card accounts, assuming the other factors remained the same, he would now have a credit utilization ratio of 20%. Still, excellent. If this person wanted to close two cards and just keep two, then by all means, he should. It won't hurt him or help him one way or the other to keep or close those accounts.

Back to the real world, we don't know all these factors (and certainly, it wouldn't be so clear as this imagined example), however, in a general sense there are certain factors that hold true:

1) When it comes to your credit score, your credit utilization ratio is a factor. Though a relatively small percentage factor of your overall score (and one that people seem to obsess over much too much) it does, as a matter of fact, count. What is just as true, however, is that whether your ratio is 22% or 12% probably matters none at all. As long as you below 50% you are most likely just fine. Below 30% may be better, depending on other factors, however, it is extremely doubtful that if you ratio is 30% and it changes to 25% (or vice-versa) that it will make much, if any, difference in your actual score.

2) When it comes to mortgage lending, your debt to income ratio is a major factor. If you can carry multiple open lines of credit or high, unused credit limits, then whether or not to close accounts is not a yes and no, black and white question to answer. It depends on (a) your income (b) if you have other debt and what type and amount of debt load you have.

Therefore:

As a general rule, people have adopted keeping lines of credit open as a way to help improve their credit score. This may often be truly helpful, but many times, likely isn't.

As another general rule, ditch debt, including potential debt prior to a mortgage. However, if you can include the available credit on open card accounts as debt in calculations, and still have a good debt to credit ratio, then there is no real reason to close those accounts.

Meaning, that in many cases, it is simply a personal choice of whether or not to keep the cards open. If there is any question, or rather real possibility, that closing the cards could hurt one's score (due to the utilization ratio) then one might want to close only one/some of open cards, or none. If, however, there is any real possibility that keeping the cards open would 'create' potential debt that could count against a person in the mortgage lending process, then one would want to close the accounts.

And, before anyone points it out, closing old credit lines will also affect another portion of your credit score, the average age of accounts, when it comes to the question at hand, that doesn't not need to play a part in the decision. If it would hurt the ability to get a mortgage or get a better rate to have a card or cards open, then close them, period.

Otherwise, a person just has to make a personal choice. Other factors play in as well, such as Sweep's remark concerning the potential a person may have to use 'unused' credit in a way that accumulates new debt for the person.


(Note: My apologies; I do not have time to re-write/edit this post this morning. Hopefully, I made a few points clearly. If it is jumbled, remember, it is not written, or re-written, as an article. I also don't intend to come off as a know-it-all. These are just my comments as a part of this discussion.)

[safari]

Poundwise, what you said may be true for some lenders; however, from my personal experience the credit limits didn't matter when obtaining a mortgage. I refinanced my mortgage 3 years ago and I got the very best rate at that time, even though the total credit limit I had available to me was greater than my gross income.

[JanH]

I think that the possible incurred debt might have been what my friend was talking about. That lenders might think she could rack up a lot of debt because she had high limits. I think she lowered hers. But I didn't know if that was the norm for lenders.

[poundwise]

Originally Posted by safari

Poundwise, what you said may be true for some lenders; however, from my personal experience the credit limits didn't matter when obtaining a mortgage. I refinanced my mortgage 3 years ago and I got the very best rate at that time, even though the total credit limit I had available to me was greater than my gross income.

As I have stated a multiplicity of times on this forum, there are many factors that go into (a) the credit score (moreso that what is told with a pie chart and a few paragraphs) and (b) a mortgage lenders decision.

Since lenders vary, so do expectations, requirements, etc.

I surely do believe you regarding your own experience. That, however, does not change the fact that the vast majority of lenders will tell you that having high, unused, credit limits, will (a) limit the amount you can borrow, (b) potentially increase the rate you are offered, or (c) both.

The best thing may be to talk to a potential lender months prior to applying and ask what they look for and etc. Then one can know what helps and what hurts, what matters and what doesn't in a specific way.

[amberbamber]

I'm guessing that we'll probably just lower it. Not by half, but by some amount. That way our "possible" debt wouldn't be that much.

Thanks everyone for all the advice. I love this site!

[LuxLiving]

Poundwise we had exactly that happen to us - "ooooh, Hubster & Mrs. Frugalis we (mortgage company) see you have $25,000 credit limit w/___ CC company. That is not good! You could possibly charge it up to that amount." "We don't owe them a dime."

AND we've never owed more than 7000.00 to any credit card and have excellent credit - never a missed payment in over 30 years - I think we've made two late payments in that time which were accidental not counting holiday days in mail timing.

So what you are describing can and does happen poundwise.

At that time we just called the CC and had them lower it - we had never asked for it to be that high to begin with.

amberbamber your limits aren't all that high so I'd just leave them alone for now until you get your emergency fund fully funded and then at that time I might call for them to be lowered.