Is it beneficial to reduce my credit card limit?

On the road to a debt-free life, credit card users who reduce the balance on their cards are faced with the option of reducing its credit limit, as well. For example, a user with a $15,000 credit limit who has consistently made timely payments and reduced the balance to $8,000 may ponder whether or not to voluntarily reduce the limit to $10,000. Though this is a valid debt-fighting tool as it restrains users from ever reaching such a high balance again, credit card users should be aware that reducing the limit on credit cards will not improve a credit report.

Unlike their U.S. or U.K. counterparts, under federal law Australian credit reports aren’t allowed to list the account’s credit limit, highest balance, or current balance. It only lists the borrower’s personal information such as name, address, and employment; their credit application history including when and to which lender the application was made; and whether the account is past due. So voluntarily reducing a credit card’s limit available will have no effect on the credit report at all.

In fact, reducing the credit limit can be counterproductive. If there’s an emergency, a reduced line of credit can be a disaster, leaving the cardholder unable to meet a sudden financial obligation or a necessary expense, either of which could cause damage to the credit report. The best method to improve a credit report is to continue making timely payments.

It’s also recommended that once cards have been paid off, cardholders should leave the account open even if there are no immediate plans to use it again, as the average age of credit accounts and the amount of credit a cardholder has available are influential in a credit report. However, because Australian credit reports don’t list whether a loan has been repaid, keeping an account open can limit future borrowing. It’s usually advised to leave it open but unused to protect the credit rating, but close it before requesting any new loans, because under federal law, the lender is required to remove the listing from the credit report within 45 days of the account being closed.

For a compulsive shopper, it may be beneficial to reduce a credit card limit. If the cardholder is likely to continue spending on the credit card and racking up excess debt, a reduced credit limit can limit the damage.

Credit card users should remember to be diligent, continue making timely payments each month focusing on debt outstanding, and not so much the unused available credit.