Gary Foreman: Ask for a lower credit limit? Why?

Unless you can't control your spending, don't

By Gary Foreman

The New Frugal You

Gary Foreman is a former financial planner who currently edits The Dollar Stretcher website and newsletters. He writes "New Frugal You," a weekly Q&A column about frugal living, for CreditCards.com Ask a question. 'New Frugal You' archive

Dear New Frugal You,
I have nearly $30,000 in credit card debt split among four cards. That's actually good news because, at one point, it was close to $40,000. Now, I pay cash for nearly everything. When I do use a card, I pay the amount of that purchase on top of my monthly payment. On the two cards with the highest rates, I'm making the "three-year payoff" amount every month. I'm making the minimum payment on my lowest interest card, which has a 3.99 percent fixed APR. I don't intend to ever use that card again. The balance on that card is just under $9,000, with a credit limit of $16,200. Would it help or hurt my credit score if I ask that credit card company to lower my credit limit? And to what amount? Thank you. -- R.H.

Dear R.H.,
Congratulations R.H., you're well on your way to becoming debt free! It must have seemed like a mountain when you started.

Your question is one of the deepest secrets of the world of credit cards. No one can give you an exact answer. That's because FICO -- the creator and keeper of the FICO credit score -- chooses only to give us broad categories of how it calculates credit scores. Though FICO recently loosened up a bit and revealed broadly how much certain actions hurt a score, they still keep the details of their formula a secret. So there's no way that you or I could say for certain how much any single action would move our scores.

FICO, which used to be called Fair Isaac Corp. but now goes exclusively by the acronym, does say that the length of credit history is worth 15 percent and that the amounts owed comprise worth 30 percent. Included in those are the average age of your credit accounts and what portion of your available credit is still available to you.

So based on that, it would be wise to leave the credit limit alone. By reducing your credit limit, you lower the percentage of credit available. Also, once you pay an account to zero balance, don't be too quick to close the account. Even if you never plan on using it, leaving it open increases the average age of your credit accounts and the amount of credit available. So unless you just can't handle credit -- and it sounds like you can -- don't close the account.

Most important, you're already using the best tool to improve your score. You're paying your bills on time and reducing the amount of debt that you have. FICO is clear on that.

One other thing you can do to improve your score is to check your credit report for errors. Some studies show that roughly one in four accounts have significant errors.

It's great that you're working a plan to pay down your credit card bills, but don't obsess over your credit score. We all agree that having a high credit score is better than having a low one, but that still leaves the question of how important a higher score is to you. Sure, credit scores are being more widely used -- your FICO score can affect what you pay for auto insurance, whether you get rental housing and even get hired for a job -- but the largest effect for most of us is still when we apply for credit (credit cards, auto loans, mortgage). You may be doing none of those things right now.

Plus, the higher your score, the less likely a change will affect your life. For instance, if your score is 700 or higher, asking for a lower credit limit might change your score, but probably won't have an effect on what you pay for loans or whether you can get an apartment or a job. On the other hand, if your score is below 640, you should be careful with any step you take.

So the best thing you can do now is to focus on continuing to pay down the balance each month and not be overly concerned with your unused available credit.

See related: Learn how to live on a bare-bones budget, How FICO calculates credit scores, FICO reveals how much certain actions hurt a score, Don't get obsessive about your creidt score 

For more than 35 years, Gary Foreman has worked to help people get the most for their money. Prior to founding The Dollar Stretcher.com, he was a financial planner and purchasing manager. Gary began The Dollar Stretcher website and newsletters in April 1996. Today the website features more than 6,000 articles on different ways to live better for less. Gary has been interviewed by The Wall Street Journal, The Nightly Business Report, USA Today, Reader's Digest and other newspapers and magazines. Gary answers a question about a budgeting or saving issue from a CreditCards.com reader each week. Send your question to The New Frugal You.

Published: October 21, 2010

	Three most recent New Frugal You stories: How to price garage sale items – Pricing garage sale items isn't an exact science. But if you consult pricing guidelines, know your market and group like items together, you'll do well ... Paying down debt vs. saving: how to decide – To get the most out of any extra money, compare how much you could pull in by saving it against how much interest you're paying out on your loans ... If your job's uncertain, avoid new debt – Working in an uncertain industry can mean frequent job losses, so if you get a new job, reassess your prospects, start saving and avoid new debt ...

	CreditCards.com's newsletter Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!