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Understanding Credit Limits and How They Impact Your Credit Score

At O1ne Mortgage, we prioritize consumer credit and finance education. This post aims to provide an objective view to help you make the best decisions regarding your credit limits and their impact on your credit score. For any mortgage-related needs, feel free to call us at 213-732-3074.

Why a Credit Card Issuer Might Lower Your Credit Limit

If you rarely use a credit card or only utilize a small portion of your available credit, a credit card issuer might decide to lower your credit limit. Credit card issuers aim to minimize risk and may review accounts to determine if credit limits should be reduced, especially if they notice changes in a consumer’s financial behavior or general economic shifts.

What to Do if Your Credit Limit Is Reduced

If your credit limit is reduced, here are some steps you can take:

• Contact the Card Issuer: Understand why your limit was reduced and request to have your previous limit restored, especially if you have a good payment history.
• Use the Card More Often: If the reduction is due to inactivity, consider using the card for small purchases and paying off the balance immediately.
• Explore Other Options: If your credit is good, you can ask other issuers to increase your limit or apply for a new credit card.

How Can a Reduced Credit Limit Affect Your Credit?

A lower credit limit can impact your credit score due to the credit utilization rate, which is the percentage of your available credit that you are using. Keeping your credit utilization under 30% is advisable, and under 10% is even better.

For example, if you have a credit card with a $20,000 limit and a second card with a $15,000 limit and a $10,000 balance, your overall utilization is 29%. If the first card’s limit is reduced to $12,000, your overall utilization jumps to 37%, potentially lowering your credit score.

The Bottom Line

Maintaining high credit limits with low utilization can help boost your credit scores. While credit limits can be lowered for reasons beyond your control, such as economic conditions or business goals, paying on time and keeping your card active can help avoid reductions. If your limit is lowered, consider applying for a new card or requesting higher limits on other cards to maintain a similar overall credit limit and protect your credit score.

For more personalized advice and assistance with your mortgage needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.

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