Lower credit card limits didn’t change my credit score…Why?

Your credit limits can affect your credit score and your chances of approval, but it’s not always as simple as changing one to improve the other.

When I got my 2 current credit cards, I didn’t ask for any particular limit and ended up with combined credit limits of over $22,000.

Last year, I cut my credit card limits in half and was curious to see if that would impact my credit score (which was already high). He does not have.

A screenshot of the author's credit score in the Finder app, showing no changes in the last 6 months.

My credit score in the Finder app hasn’t changed in over 6 months, despite lowering my credit limits during that time. Image: Researcher

This surprised me, because I knew that having access to $22,000 of credit could impact any new application for a credit card, personal loan, or even a home loan.

Some experts even suggest reducing your credit limits or canceling your credit cards to improve your chances of approval.

So I decided to dig a little deeper and find out more about what your credit limit can affect – and when it really matters.

Credit scores and new applications

Experian’s managing director of credit services for Australia and New Zealand, Tristan Taylor, confirmed that credit limits are just “one of the factors that could influence a credit score”.

“That said, not all factors are equally weighted in determining a credit score. [and] these factors do not necessarily affect all people equally.”

So while my credit score didn’t change after I lowered my credit limits, yours might.

Taylor also explained that credit scores are just a factor in a credit application.

“Some lenders will deny credit applications solely on the basis of a very low credit score, although it is more common to use a credit score in combination with a range of other factors to make a decision,” did he declare.

“A high credit score alone will never guarantee an approval, although it will almost certainly help.”

Lenders have an obligation to lend responsibly, which means factors such as your income and expenses must be considered in addition to your credit score.

Tristan Taylor, managing director of credit services for Experian in Australia and New Zealand

Why your credit limits still matter to new lenders

Even if lowering your credit limit doesn’t change your credit score, it could improve your chances of approval in other ways.

Gerry Incollingo, managing partner of the accounting and financial firm LCI Partnerssaid lenders base their assessments on “the total limits available to the applicant rather than the balance owing.”

“For example, a customer who has $50,000 in credit card limits, but only owes $5,000 will still need to be able to repay the proposed loan based on the $50,000 limits in place.”

In other words, the claim would be assessed based on monthly repayments of $50,000 credit card debt – even if you never had a balance.

“Therefore, reducing these limits will most likely increase total borrowing capacity. This also works the same for existing mortgages in place,” Incollingo said.

Note: Some lenders may consider your actual balances in their assessment when you apply. Therefore, paying off what you owe can still have a positive impact.

So, was lowering my credit limits worth it?

My credit rating may not have changed, but the amount of money I can borrow (and my chances of approval) has potentially increased because I lowered my credit card limits.

It also reminded me of a few key details to keep in mind if you’re considering lowering your own credit limits, improving your credit score, or looking to get approved for a new loan:

  • Your credit score is based on many different factors, including your credit limits, repayment history, and new credit applications.
  • Your credit report contains a lot of valuable information for lenders – so it’s worth getting your own copy too.
  • Higher credit limits also come with higher debt risk.
  • Lenders look at the details in most areas of your life to help them make a decision.
  • If you want to apply for a home loan, you can use Finder’s home loan facility calculator to see the impact changing your credit limits can have.

At the end of the line ? Any change that puts you in a better financial position can help improve your credit score and the outcome of new applications.

Getting ready to apply for a new credit card or loan? You can check your chances of approval through the Finder app for free and get monthly updates on your credit score.

Image credit: Finder (Luke Dubbelde)

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