Does A Low Credit Card Limit Lower Your Credit Score?
Ever wondered why the spending limits on credit cards vary drastically? The spending limits of consumer accounts are decided by credit card companies in order to reduce their risk. The exact policies for deciding the credit limit may vary but some of the common factors like your credit history and income are considered. Your credit limit plays an essential role in determining your credit score.
A low credit limit may not have an impact on your credit score, but it can be an obstacle when it comes to improving your credit score. If you are not much aware of the factors that affect your credit score, a credit repair company like RMCN can help. In this brief post, we’ll provide you information on how a low credit limit can affect your credit score.
How does low credit limit hurt your credit report?
Credit utilization ratio
An important factor that impacts your credit score is your credit utilization ratio. It is the difference between your spending limit and the credit usage. A lower ratio indicates that you have lesser financial risk and a good credit score. However, a higher ratio poses a higher financial risk and hampers your effort of increasing your credit score. The rule of thumb is to maintain a healthy credit utilization ratio that is not more than 30 percent to avoid any damage to your credit score.
Lowering your Credit Limit
A low credit limit does not necessarily impact your credit ranking. The problem arises when you need to maintain a favourable credit-utilization ratio with a low spending limit especially if your credit card is used regularly. In addition to this, every bank has its own criteria that you need to meet before they increase your credit limit. However, on-time payments can have a positive impact when you request the bank to increase your credit limit.
An important point that you need to remember is a low spending limit doesn’t have an impact on your credit score. However, your credit score may plunge if the bank decides to lower your credit limit.
In case your bank plans to lower your credit limit and you are not in a position to pay off the balance before implementing the change, you can transfer your the balance to a credit card that has a higher limit to preserve your credit rating. This will entitle you to special incentives such as temporary low interest rates and fees by a number of credit card companies. This helps in paying off the debt and protecting the credit score.