How credit limit decreases can affect your score
Your FICO® score considers your credit limit when determining your credit utilization rate. Utilization means the amount of your available credit that is being used at the time that your score is calculated.
Generally speaking, keeping your balances low on credit cards is good for your FICO score because that helps keeps your credit utilization rate low.
When a lender raises your credit card limit, that may lower your credit utilization rate and, in some cases, could increase your score.
When a lender lowers your limit or closes your credit card account, that may raise your credit utilization rate. It doesn't matter to your FICO score who closed your account — you or the lender. Closed accounts can remain on your credit report for several years. This can be a good thing since the account's record can continue to benefit your score in areas such as the length of your credit history.
When we study credit reports, we find that once a lender has reduced an account's credit limit or closed the account, the borrower's FICO score may go down, it may go up, or it may stay the same. This can be influenced by one or more of the following:
- The amount by which your credit limit is reduced
- How you react to the reduction in credit limit. For example, do you make or miss payments? Do you increase or pay down balances? Do you open a new account?
- Your credit report may change in other ways between the time your credit card limit is reduced and the time that the lender reports the change to the credit bureau. For example, you will likely use your credit accounts and pay your creditors, which will result in changes to your reported balances. You may pay down balances on your credit cards or pay them off entirely. You may open or close accounts. Such changes to your credit report will also influence your FICO score.
While such changes to your credit report may be varied and complex, managing your score doesn't need to be complex. Good credit habits will help you manage your FICO score over time.