Will Lowering Credit Limits Increase a FICO Score?

Your credit score is a measure of your financial health, and your scores can affect whether you will be approved for a mortgage or car loan, in addition to the interest rates you will pay on borrowed money. FICO scores reflect how effectively you manage your money and pay your bills. If you ever receive a recommendation to lower your credit limits to increase your credit score, be warned that this may not be the best advice.

Elected Credit Limit Decrease

There are several reasons why you may think it's a good idea to lower your total credit limit. If you have a history of good credit, many lenders will continue to increase your credit limit on credit cards throughout the years. When you choose not to access the total credit available to you, or if it seems too tempting to have that credit at your disposal, you may convince yourself that it makes more sense to ask for a decrease to your credit limits. In some cases, you may be advised to lower your credit limits to reduce your perceived risk when applying for a mortgage or other personal loan.

Lender-initiated Decreases

Many lenders are in the practice of involuntarily reducing consumer credit limits. Even if you don't request a credit limit decrease, and even if you have always paid your bill on time with a positive payment history, you many find your total credit limit inexplicably lowered one day. Some lenders have tightened their credit standards to reduce their total financial risks in the wake of the 2007 recession and subsequent credit crunch.

The Effects

Rather than increasing your FICO score, lowering your credit limits can actually have the opposite effect, and may lower your overall credit score. RepairBadCreditReport.com recommends keeping your total account balances anywhere between 20 to 50 percent of your total available credit for the best credit score. Utilizing a higher percentage of your available credit often results in lower FICO scores. Even when you follow this practice, if your available credit is lowered while you maintain a balance on the account, it may change your debt to available credit ratio. This change could negatively impact your FICO score.

What to Do

If you have a solid credit history with your lenders, and you are looking to increase your credit score, it may benefit you more to request a credit line increase rather than a reduction. Although you should not utilize all of the available credit, having a higher limit with a low balance can increase your FICO scores. U.S. News and World Report also indicates you can also increase your credit scores by paying down the balance on any credit accounts you currently maintain, so that the debt is less than 50 percent of the total credit line.