Is It Wise to Reduce Your Credit Limit?
If you’ve been working diligently to reduce your credit card balance, you might find that having that available amount to spend is pushing the limits of temptation. Rather than give in and start the debt cycle all over again, you might consider reducing your credit limit too.
Not only does this remove the temptation to pay for more purchases and get right back into your normal habit of credit card spending, but it also helps to stop you from reaching such a high level of debt again in future.
As you pay down more of your outstanding debt, you have the option of reducing your credit limit further, or you might decide to leave a little available to cover any emergencies that could arise.
Other Ways Lowering Your Credit Limit Can Help You
Asking your bank for a lower credit limit won’t damage your credit rating in the slightest. The Australian credit reporting system isn’t reliant on knowing how much credit you have, how much you owe, or what your balances might be. This means that reducing your credit limit won’t have any effect on your credit rating at all.
Having a lower credit limit can also help you to qualify for slightly better borrowing capacity when applying for a mortgage. Home loan assessors calculate the amount you can afford to borrow for a mortgage by checking out your level of available credit. They take your credit limit and factor a payment of around 3% of that limit that is then deducted from your income amount. Then they’ll work out how much of your income is remaining to pay for mortgage repayments. With a lower limit, this leaves you with more of your own income remaining to pay your home loan.
If you’ve often had trouble keeping track of your credit card spending, asking your bank to lower your credit limit can also make it easier for you to spend less using credit. It may also become a good incentive for you to start saving more instead of spending your income on credit card repayments.
Once you’ve managed to repay your credit card balance off entirely, you might still opt to maintain a reasonable credit limit on your credit card. Just be very aware that you don’t want to get back into the debt trap and begin the cycle of repaying your expenditure over years once again.
Use your credit card wisely, keep track of your credit card spending, and consider whether having such a high credit limit is working for your financial situation or not. If you’ve only ever known problems and expensive interest bills from having a credit card with a large available limit, reducing that limit will only help to strengthen your financial situation in the long run.Back to top