Lower credit limit surprise nearly spoils a sale

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
Erica my limit was dropped to $100 but I didn't know it until I was trying to buy something for $400 at the store. I had to talk the person on the phone right there! It was terrible. But she made it $500 on the spot so I could buy what I wanted and get the discount. Did I do the right thing or did I just hurt my credit scores again? I'm worried. -- Jodie 

Answer Dear Jodie,
There's nothing like a public rejection at a checkout counter to bring the blood to the cheeks!

Now that the surprise ordeal is over, however, you can stop worrying. I believe that taking the higher limit offer was the correct action. Exactly why the creditor lowered your spending limit to such a minuscule amount in the first place is a mystery (though its typically triggered by a series of late payments), but now it's back up to a more reasonable level. The positive effect is twofold: You have more shopping latitude, which is great, and you also may have improved your credit score.

The most common scoring system in use is the FICO, and you'll want to keep these numbers up. The better your scores are, the more you'll appeal to lenders. These numerical ratings range from 300 to 850, and excellent scores are the mid-700s and above. Creditors, including those you are already doing business with, check the scores of their customers regularly. If the digits dip dramatically, they can reduce the credit line or even close the account entirely. For this reason you'll want to keep your FICO score in good shape.

So how can the act of allowing the creditor to hike up your credit limit help your score? The answer lies in the way they're calculated.

Payment history is the most weighty factor in a FICO, so by paying all of your credit cards and loans on time, you're doing great in that category. The second most important factor is the amount of money you owe as compared to the amount you're able to borrow. If the balances you maintain climb, your scores will slide downward. Therefore, if you're carrying a large amount of debt, the simple act of quadrupling your credit line -- which is what you just did -- will expand this utilization ratio. Instant scoring points!

Still, the best way to build and maintain a positive FICO is to charge with the card often and pay when you should but also not carry any debt at all. The 30 percent marker is a warning, not a suggestion to hang onto debt. It is always ideal to pay off the entire bill. This way you'll ever be in over your head and your creditors will see that you can handle even substantial credit limits. Depending on the card, such limits can be in the tens of thousands of dollars and beyond.

And speaking of limits, it is also a good idea to know your personal parameters. Too many people get into financial trouble because they have an overabundance of charging ability. Sometimes a shorter borrowing line is best, as it keeps you in control and out of too much trouble.

As the Greek philosopher Socrates said, "Know thyself." Before swiping, conduct an inner dialog. Ask yourself, "Will I have the cash to pay this item or service in full in 30 days? Will it cause me stress or make paying for essentials difficult?" When you know the answers to those questions, you can modify your charging behavior -- before your creditor modifies it for you.

See related: How FICO scores work: credit utilization

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Updated: 03-26-2019