Decreasing Credit Limit Have A Positive or Negative Impact on Credit Score?

A decrease in credit limit can have a negative impact on credit score. This is because credit utilization, which is the amount of credit used compared to the total available credit, is a significant factor in determining credit score. When a credit limit is decreased, the credit utilization ratio increases, potentially leading to a lower credit score. However, it’s important to note that other factors such as on-time payments and low outstanding debt also play a role in determining credit score and a decrease in credit limit alone may not significantly impact it.

A decrease in credit limit can have a negative impact on credit score for several reasons:

1. Credit utilization: Credit utilization, which is the amount of credit used compared to the total available credit, is a significant factor in determining credit score. When a credit limit is decreased, the credit utilization ratio increases, potentially leading to a lower credit score.
2. Decreased flexibility: A lower credit limit can also limit the flexibility of a borrower to handle unexpected expenses or emergencies. This can also lead to additional stress, which could affect the borrower’s ability to make payments on time, which in turn can affect the credit score negatively.
3. Negative impact on credit history: A decrease in credit limit can also negatively impact credit history. If the decrease is a result of a missed payment or other negative behaviour, this can be reflected in the credit report and can lower the credit score.
4. Other factors: However, it’s important to note that other factors such as on-time payments and low outstanding debt also play a role in determining a credit score. So, a decrease in credit limit alone may not significantly impact it.
5. Credit Score calculation: Credit score is calculated by various credit bureaus such as CIBIL, Equifax, Experian, and CRIF High Mark using their own proprietary algorithms, which may slightly vary in how they consider the credit limit decrease as an influencing factor. The calculation of credit scores in India typically takes into account the following factors:

– Payment history: Making payments on time is one of the most important factors in determining credit score in India. Late payments, defaults or collections can have a negative impact on credit scores.

– Credit utilization: Credit utilization, which is the amount of credit used compared to the total available credit, is also considered in determining a credit score.

– Length of credit history: The longer a borrower’s credit history, the better their credit score is likely to be. This is because lenders want to see a history of responsible borrowing behaviour.

It’s worth noting that credit limit decrease can be a result of many reasons and it’s not always because of any negative behaviour of the borrower. Sometimes credit card companies can reduce credit limits as a precautionary measure if they believe there is a risk of default or due to market conditions.

Bottom line:

In summary, decreasing the credit limit can negatively impact a credit score because it increases the credit utilization ratio, which is a factor in determining a credit score. However, other factors such as on-time payments and low outstanding debt also play a role in determining a credit score, so a decrease in credit limit alone may not significantly impact it.