Can credit rating be negatively affected by 'reducing' credit limit on existing card?

don9999

A little while ago I applied for a new credit card (with the intention of performing a balance transfer) which was turned down. Reason given was that I had too much available Credit. Probably true as I had 4 credit cards with balances on them.

Am now in the process of rationalising my cards - have just closed one that had a zero balance, and planning to reduce credit limits of others (I only use them for 0% balance transfers, so as I have paid the balances off monthly, I have freed up available credit. I can now reduce this.)

I just called Virgin to ask to reduce credit limit, and they advised that this could 'negatively affect' my credit rating.
Is this true?

I 'thought' that by reducing my unused available credit would actually 'benefit' my credit rating (for example, 'if' I apply for a new card in the future, they won't necessarily refuse due to me having too much available credit).
However, I 'can' sort of understand the possible negative affect. The Virgin rep advised that my credit file would show that the 'company' had reduced the credit limit, and not that 'I' had asked for it to be reduced.
I guess a future company may be concerned that a cc company had decided to reduce my credit limit.

So I don't know what to do for the best.

There is always the option of leaving the credit limit high, leaving me the opportunity to balance transfer to it in the future - however, the deals available elsewhere are a lot cheaper.

Any thoughts?

BugsyBrowne

To much available credit is a negative not enough avaiable credit is also a negative so it's boll*ks if you ask me.

InsideInsurance

Every lender has its own rules when it decides what it likes and doesnt like. Some of the considerations include:

1) Total amount of available credit
2) Utilisation rate (what percentage of available credit is used)
3) Individual credit agreement limits

Generally speaking, if you had £10,000 of available credit another lender would much rather see that split over 1 or 2 cards than over 10. Whilst it doesnt impact on points one or two above lenders get comfort in the idea that other lenders think they can trust you to have high limits

Rather than having 3 cards all with lower limits you MAY be better off closing 1 card and reducing the limit of only one of the other cards thus ideally leaving you with the highest limit card intact to show others the trust that lender has placed in you.

exel1966

don9999 wrote: »

Can credit rating be negatively affected by 'reducing' credit limit on existing card?

Yes it certainly can !

You definitely need to look at (on a card by card basis and total basis) the used credit to credit available ratio.

EG. £20K combined limit with outstanding balance of £4k gives a 20% utilisation.

now reduce your limit to £5k and you have a utilisation of 80%.

What do you think is better ?

But then you have to weigh this up against income, the limits you require, other credit (loans, finance etc) and a whole host of other things.

jo-bo

Your report will show a reduction in limit NOT who did it.

thenudeone

Example:

Person A
Income £30k
Credit available £10k
Borrowings £5k
Free credit £5k

Person B
Income £30k
Credit available £5k
Borrowings £5k
Free credit £0k

Who is a lower risk?

It's very subjective but here's some thoughts:

Probably A, because they have proved they can resist the temptation to spend (possibly recklessly) up to their available credit, and they've got a buffer in case anything unexpected turns up.

Person B may be very responsible in their spending, but if something goes wrong (such as a major car repair bill; redundancy; or sickness) they might quickly run into trouble because they have no (visible) financial buffer. Actually, they may have plenty of savings and investments to tide them over a rough patch, but these aren't shown on credit reports and aren't part of the lending decision. In the olden days with bank managers making decisions, it would have been.