On the surface, I can understand reader Ginny Witt’s rationale for wanting her credit card company to slash her credit limit.
“I have paid off my Visa card, as I will soon be retiring,” she wrote me. “My income — never large — will be cut in half when I retire — very scary. My credit is good, and I want to keep it way.”
Witt has a $20,000 credit card limit. This is “way, way too high, given how low my income will be when I retire,” she said.
She asked whether it would be a good idea to request that her card issuer lower her credit limit to “perhaps $5,000.”
“Actually, I would like it to be $1,000,” Witt said. “Will my good credit be ruined by asking to do that?”
I wouldn’t say it would be ruined, but it could suffer.
My advice to Witt and others considering asking for a credit line decrease is: Don’t do it.
First of all, your income has nothing to do with the quality of your credit.
“The fact that her income is changing has no bearing on her credit,” said Todd Mark, vice president of education at Consumer Credit Counseling Service of Greater Dallas. “If everything is good now, don’t fix what isn’t broke.”
Second, the effect of a lower credit limit would be a higher “credit utilization ratio,” meaning the percentage of a consumer’s available credit that is used. The higher the number, the riskier the consumer looks to creditors.
Indeed, the second-largest component of the FICO credit score used by most lenders is amounts owed, including the proportion of balances to total credit limits.
Credit experts say consumers with the highest credit scores use no more than 10 percent of their available credit.
One of the ways to accomplish that is to maintain a high credit limit but not increase your use of it.
The math works against you if you have a lower credit limit.
For example, if you have a $1,000 credit limit and you spend $500 on tires with that $1,000 credit limit, you would be using 50 percent of your credit limit.
But if you charged that same $500 on a card with a $20,000 credit limit, you would be using only 2.5 percent of your available credit.
“It’s going to make you look more utilized even if you make nominal charges,” said John Ulzheimer, president of consumer education at SmartCredit.com, a credit-monitoring website.
The other issue is that you would have less credit at your disposal in an emergency.
A $1,000 credit limit “almost makes it unusable, except for anything like groceries, gas,” Ulzheimer said. “Having a card with a $20,000 limit is smart because you have access to least $20,000 of capital, which is a good thing, especially if you’re retiring with low income.”
I stress that this advice applies only if you are financially disciplined and use credit prudently.
If a cardholder asked for a lower credit limit, the card issuer would honor the request, said Carol Kaplan, spokeswoman for the American Bankers Association.
Still, Ulzheimer said, “I can’t think of a circumstance where that’s a good idea, except if the consumer realizes that they are so undisciplined that they can’t help themselves from getting into credit card debt if the card was left open with the higher credit limit.”
The card issuer also could do something far worse to your account, said Ulzheimer.
“They may actually close it on you if you make that request,” he said. “You’re telling the issuer that you plan to use it increasingly sparingly or not at all. The reason they gave you the $20,000 credit limit initially is because they want to incent usage and generate revenue.”
Ulzheimer said an alternative for Witt is to apply for a “classic credit card,” which has a very low credit limit, and not use the card with the $20,000 credit limit.
“She still has the available credit she needs for an emergency,” he said.
Witt might charge a small amount occasionally on the larger-limit card and pay it off just to show some activity on the account.
The best kind of credit limit is one that you impose on yourself by using your credit card sparingly and paying it off on time every month.
Source: McClatchy-Tribune Information Services.