The Sky's the Limit

I have two credit cards with very high credit limits -- higher than I need or use. Could this hurt my credit score?

It's a common misperception that high credit-card limits can hurt an individual's credit score. Truth is, high limits have no bearing on a credit score, while low ones may actually hurt it.

As you probably know, an individual's FICO score -; the figure calculated by Fair Isaac that most lenders use to assess credit risk -; is calculated based on a number of factors, including the length of your credit history, whether you pay your bills on time and your debt levels. (For more on this, read our story "Keeping Score.") It doesn't, however, take into account the amount of credit available as a single factor, explains Craig Watts, a spokesperson for Fair Isaac. "You could have $1 million in unused credit and that wouldn't matter to the FICO score," he says.

Credit limits do come into play, however, when the FICO score assesses one's debt load. In this case, FICO compares the outstanding debts to the total available credit and comes up with the so-called "credit utilization ratio." This is basically the percentage of credit used on each revolving account, as well as the total debt used for all revolving accounts.

Say, for example, an individual has two credit cards, one with a $10,000 limit and the other with a $20,000 limit. The balances are $2,000 and $5,000. The credit utilization on each card is 20% and 25%, respectively, and the total usage compared to the total available credit ($7,000 out of $30,000) is roughly 23.4%.

Should credit utilization exceed 50%, the FICO score drops, explains Gerri Detweiler, a debt counselor in Sarasota, Fla., and author of "The Ultimate Credit Handbook." "If you can keep it below 50%, both individually and on all accounts, it should not impact your score negatively," she says.

In other words, lowering a credit-card limit will also lower the amount the cardholder can safely revolve without exceeding the 50% mark. This holds true even for those who fully pay off their bills each month, according to Detweiler, as even temporary balances usually appear on the credit report.

One important caveat: While high credit limits have no bearing on FICO scores, individual lenders reviewing one's credit report may have a different take on the matter, warns Watts. Fact is, while an individual's credit score is a hugely important factor for most lenders considering an application, many creditors -; including mortgage and car lenders -; review additional information such as income and total available credit. In that case, a lender could be concerned about an applicant's "potential debt."

"Depending on the policies of the lenders you're talking with about opening new credit, they may be sensitive to the amount of credit that's open to you," says Watts.

If a lender has a problem with an individual's high credit limits, the applicant could always seek a loan elsewhere. Assuming he or she has a good credit record, many alternatives should be available. On the other hand, those who want to stick with a particular lender may have no other choice than to play along and reduce their limits.

For more on credit scores, visit our Debt Management center.