I just got a letter from a company I have a credit card with, saying they will reduce my credit limit by a certain amount in X number of days. They say the decision was based on my credit report, so I’m going to check that to see what it says.
What I realized almost immediately is reducing my available credit is going to negatively affect that report, no matter what’s in there. Specifically, it’s going to increase my debt-to-credit limit ratio. Everyone should know what that is, but if you don’t, here’s the explanation.
It compares the balances you have on credit cards (and other things that I can’t think of right now) to the total of the credit limits on all of your cards. A lower ratio indicates you’re able to manage your credit well.
Here’s a simple example. You have a $300 balance and your credit limit is $1500. You’re at 20% debt-to-limit, or a 1:5 ratio. If your limit drops to $1200, your debt ratio just jumped to 25% / 1:4 ratio.
This is the same reason why people are advised that when they get a credit card paid off, do not close the account even if you never plan to use it again. The unused available credit goes towards your overall total limit, which reduces your ratio. To make sure that credit card company doesn’t close the account due to disuse, buy something with it every once in a while to keep it active.
Your credit score goes down when you pay off a loan, too. If you have any kind of credit or credit score monitoring (a couple of my credit cards give me this for free), you’ll get an email saying “your credit score has changed, you better go look!” So you look, and it says score dropped by 4 points and now sits at 816 instead of 820 because you paid off the car last month.
This is not a reason to maintain loans. It just demonstrates the absurdity of credit scores in the first place. Always remember that this system is built to get you spending as much money as possible without defaulting.
Also: I keep getting nagged by various credit cards saying “update your salary so we can update your credit limits appropriately.” Hell no. A, you have other ways to get that data. B, you increase my limits without asking every couple years anyway. And C, my credit limits are already so high that if I used more than 10% of them, I’d be repaying that crap for years. There’s no point to me getting a higher limit.
My credit score is 816 right now. I hardly ever use it and I can damn near buy a house on credit. Just took a 80k home equity loan out for some improvements and it only went down like 4 points.
Credit scores just show how well you pay debt, and make sure you are using debt. You can game them, as I apparently accidentally have, but it’s just not worth the effort once you get in the high 700s. If you have a good relationship with a loan officer they should be going off manual underwriting anyway.
Credit is for stuff I don’t feel like dealing with today. Vet bills, car repairs, shit like that, then I look at everything on the weekend and pay it off. Emergencies are for the emergency fund. Last thing I want to do in a real emergency is rack up credit card debt on top of it, it is nice to have that last option though. But it would take ages to claw my way back out of debt.
It doesn’t matter how much credit I have. My ratio is always going to be 0. Is that even a ratio? I use credit to buy things where using debit or cash would be more difficult, then pay it off immediately. Well, with the exception of my mortgage I suppose.
They usually don’t like that as they can’t make money on you. And what a lot of people forget, not saying you do, is just like HR Departments, they don’t work for you. That score isn’t for you, except as it’s being sold as a positive goal. So it makes sense for reasonable credit use to not create a high FICO score, since it’s a number showing how much money credit card companies could make off of you.