Credit Reporting of Credit Limits

One of the factors that determines your overall credit score is your credit limit. Your credit limit is the maximum amount you are able to borrow for a particular revolving credit account. All lending institutions will report your credit limit to the credit reporting agencies that compile your credit score.

Amounts Owed

According to FICO (the agency that calculates your credit score), "amounts owed" accounts for 30 percent of your FICO score. This includes the number of accounts with balances, types of accounts, the amount owing on accounts, outstanding installment loans and proportion of credit lines used. The last item involves your credit limits.

Credit to Debt Ratio

Your credit limit is most important in relation to the amount you have borrowed. In general, it is best to have a high credit to debt ratio. For example, if you have a Visa card with a credit limit of $2,000 and a balance of $1,000 and an American Express card with a limit of $6,000 and a balance of $1,000, you would add up the limits to get $8,000 and then divide it by the sum of the balances ($2,000). Your ratio is about 4-to-1.

Considerations

Note that it is important that your credit to debt ratio be high regardless of the amount you owe. For example, it is far better to have a credit limit of $10,000 and owe $2,000 than it is to have a credit limit of $1,000 and owe $500. In the first case, your ratio would be 5-to-1. In the second, you have a credit to debt ratio of 2-to-1.

Reporting

Limits on department store cards, credit cards and other revolving credit accounts are reported to credit agencies. Loans such as mortgages, auto loans and student loans do not have a credit limit, as they are not revolving credit accounts.

Warning

Because of the importance of credit to debt ratio, it may be contrary to your best interests to cancel credit card accounts that you do not use. For example, if you have two credit cards, one with a $10,000 limit and another with a $5,000 limit, by closing the second one, you are halving your credit limit. It is may be a good idea to keep your oldest accounts open and in good standing.