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There are a lot of different factors that influence your credit score, the biggest ones being paying your bills on time, and the amount of credit that you’re utilizing. For example, if you’ve got $20,000 of available credit between all your accounts, and you’re running a combined balance of $17,000, that represents a high credit utilization, and tells credit card companies that you’re spending outside of your means. If you apply for new credit, chances are that you’re going to continue spending similarly, so a lot of companies will decline applicants who have high utilization.
TPG reader Mikhail tweeted me:
“@thepointsguy I have a high credit limit that I don’t need. Can I lower it without impacting my credit score? I pay the balance in full.”
First, Mikhail, good job for paying your balance in full! You should also try to pay it as early as possible, because even if you pay in full, credit card companies report at different times, and can even report your balance before they receive your payment. That’s one aspect of credit that I hate; it’s not right that even if you pay your bill on time, you can still have that balance reported as utilization.
At any rate, given that a low utilization is better, there’s really no benefit to reducing your credit limit, even if you don’t plan on using it. Your score will not go up if you have less credit. If the credit card company reports your credit mid-month (before you’ve paid), and you have less overall credit available, your utilization will appear higher and your score could drop. So, preemptively slicing your available credit will probably just hurt your score.
I’d say keep your credit in case you ever need it. You might get a new job and have the ability to pay for a large company expense out of pocket; you’ll be reimbursed and you can keep those points. I think having the available credit just in case of a situation like that is useful, and to make sure whatever credit you do use results in a lower utilization.
If for some reason you apply for a new card and are declined or are put in pending because you have too much available credit, you can always call up and request to move credit around. Most banks will allow you to take existing credit and apply it towards the opening of a new account.
Again, my advice is that you don’t reduce your credit limit, as doing so will probably hurt your score.
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