Which is better (or worse): reducing limits or debt to limit ratios?

MikeHartley

The is a specific question. I am trying to pay down credit card debt. I also want to maintain a good as credit rating as possible. Besides cutting overall debt is it better to:

1) Reduce the credit card limits as I cut debt. I understand that some lenders look at total credit available, and too much, even unused, is a bad thing.

2) Keep the limits as debt is paid down, to reduce the credit used to credit available ratio. Conversely, I've also read that this is something lenders use to calculate credit worthiness.

The two seem contradictory. Which is the best of the two?

Willing2Learn

My understanding is that it is a combination of the two. It is up to each individual credit provider to decide what is most important and they will all have set their own individual criteria for the products that they sell and their target market.

Personally, I would keep debt to income ratio below 40-50% and credit used to credit available ratio below 30%. I may be misguided and I'm sure others will be along soon to comment but those are the ratios that I consider reasonable. I don't have any debt as such except for loans I take out purely to keep my credit file showing good money management but do have cards (which I pay in full each month).

MikeHartley

Does it then follow that if you debt to income ratio is low, but the used credit to available limits are high, then you should raise the credit limits as paying down debt?

I suppose this might be a risky strategy if it increases the temptation to spend...

Willing2Learn

I think that "if your debt to income ratio is low, but the used credit to available limits are high" then the card user is possibly living off their credit card, not managing their budget effectively, gradually building debt and at potential financial risk.

InsideInsurance

You need to add in a third factor, not only what is your total available credit but how it is made up. If you had a £15,000 of credit available most lenders would look more favourably on you if you had 2x £7,500 than 5x £3,000 - some would prefer £10,000 + £5,000 even more

So if you do want to reduce your total available then you need to look at dropping lower limited cards rather than reducing high limited ones (but you also need to factor in APR)

Ultimately however every lender has its own criteria and even within a lender they may have different preference for different cards. You'll also find many examples of people applying for two cards at the same time and one lender accepting with a good limit/ APR and the other declining even though in theory both are aimed at the same market sector

pheonixrising21

Willing2Learn wrote: »

I think that "if your debt to income ratio is low, but the used credit to available limits are high" then the card user is possibly living off their credit card, not managing their budget effectively, gradually building debt and at potential financial risk.

Not sure I understand this at all.... The following is a very conceivable situation which is actively endorsed by MSE - "stoozing":

A person has a salary of £50k per year. They get a credit card with a limit of £5k and its their only form of credit. The card has 0% on purchases for 17 months. They make all their usual monthly spending on this card (food shopping, petrol, etc, etc), whilst transferring the same amount into a high interest savings account. After 5 months, they have spent £4500 on the credit card (but have the same amount stored up in savings account). They make payments each month of just above the minimum payment.

In the above situation the available credit to income is 10% (low), but the used to available credit is 90% (high). Is this person a high financial risk?

pheonixrising21

Though, to answer your question (I'm in a similar situation), my personal opinion is that it will be best to do both.

First, reduce your used credit to available credit a bit, then start reducing your available credit a little behind this.

Lets say you have a credit limit of £5k and have used £4.7k. Reduce your balance to say £3.5k before your start reducing the limit and maintain that "buffer" all the way down till your balance is cleared. You should be left with a £1.5k limit and £0 balance at which point you can cancel the card if its no longer required.

As I have not found any hard and fast rules on it, this is the sort of plan I am going to be following, in order to get the best of both worlds so to speak.

sfax

I wouldn't recommend reducing any limits or cancelling any cards unless you're pretty sure that you having too much credit available is the reason why you are getting rejected or getting limits that are too low.

The reason for this is that both of these things cannot easily be undone. Increasing a limit again or applying for a new card will usually both involve a new credit search and you may not get back what you had.

pheonixrising21

sfax wrote: »

I wouldn't recommend reducing any limits or cancelling any cards unless you're pretty sure that you having too much credit available is the reason why you are getting rejected or getting limits that are too low.

The reason for this is that both of these things cannot easily be undone. Increasing a limit again or applying for a new card will usually both involve a new credit search and you may not get back what you had.

Due to my current position, I will be reducing limits and cancelling cards as soon as possible, especially my AA one. This card has had the spending facility ceased after I rejected an interest rate rise. Therefore, as I cannot spend on it, it will need to be reduced as it will show as available credit without it being available to me!

My CapOne card, I may keep open once its cleared as my only working card. However, I may reduce this limit to a minimum if I am able to get another 0% deal to move the AA balance to.

Also, keeping the limits high increases the risk that you will just re-spend the whole limit and be back where you started (or worse), so not being able to get those limits back is not necessarily a bad thing

sfax

pheonixrising21 wrote: »

Also, keeping the limits high increases the risk that you will just re-spend the whole limit and be back where you started (or worse), so not being able to get those limits back is not necessarily a bad thing

Higher limits can also increase your credit rating so it depends what your priority is. Mine is maintaining a good credit rating to aid new BT deals when they come up

Willing2Learn

Willing2Learn wrote: »

I think that "if your debt to income ratio is low, but the used credit to available limits are high" then the card user is possibly living off their credit card, not managing their budget effectively, gradually building debt and at potential financial risk.

pheonixrising21 wrote: »

Not sure I understand this at all.... The following is a very conceivable situation which is actively endorsed by MSE - "stoozing":

A person has a salary of £50k per year. They get a credit card with a limit of £5k and its their only form of credit. The card has 0% on purchases for 17 months. They make all their usual monthly spending on this card (food shopping, petrol, etc, etc), whilst transferring the same amount into a high interest savings account. After 5 months, they have spent £4500 on the credit card (but have the same amount stored up in savings account). They make payments each month of just above the minimum payment.

In the above situation the available credit to income is 10% (low), but the used to available credit is 90% (high). Is this person a high financial risk?

I slow stooze myself to get every penny I can from the system.

But thing is, when I first came to this thread, I thought I had seen the OPs threads before and so I checked. Mike, the OP, has started four threads and made eleven posts. All the the threads and posts are related to £16,000 debt spread across four cards and how best to pay down the debt so that Mike and OH can put a deposit on a house.

A number of Mikes posts have been about debt consolidation. As has been pointed out by other forum members on one of the OPs other threads, looking to consolidate the debts can be risky when you are using such a high ratio of your available credit and that it could be prudent to snowball the debt and pay it down quickly, focusing on the highest interest card first as opposed to consolidation.

Slow stoozing, imho, is also risky if someone is not in full control of their finances and it would therefore be much better to fully learn to manage a budget before proceeding with a stooze (myopinion again).

That was the reason I typed what I did.