Liz Weston: Having a high credit limit on a little used card is a good thing

[ad_1]

Dear Liz: My mom is very focused on her credit rating, which is still excellent.

I found out that she had recently called her bank and asked her to lower her credit limit on one of her long-standing credit cards from $ 32,000 to $ 5,000. She only uses the card to charge small, infrequent amounts and always pays it back.

She thinks having a high credit limit counts as “potential debt” and hurts her credit profile, while I think having a high credit limit on a little used card is very good for your credit. I guess we’ll find out who’s right next month when my mom diligently checks her credit score.

In the meantime, can you weigh?

Answer: you are right. Credit scoring formulas like to see a big gap between the amount of credit you use and the credit you have. Lowering your credit limit on a card can have a negative effect on your scores.

Before the advent of credit scoring, lenders were concerned that someone with a lot of available credit would suddenly accumulate large balances and default. Data scientists found, however, that people who had been responsible enough to be given high limits tended to remain responsible for their credit.

If your mom has several other credit cards and uses this one lightly, the effect may not be significant. If she wants to keep her scores high, however, she probably shouldn’t repeat the experiment with other cards.

Liz Weston, Certified Financial Planner, is a Personal Finance Columnist for Nerdwallet. Questions can be sent to him at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at AskLizWeston.com.

[ad_2]
Source link

Comments are closed.