Monday, January 22, 2007

Is a higher credit limit worth it?

Last week's news about credit card security breaches at Winners and CIBC made for some interesting discussion over brunch with friends of mine on Sunday morning.

Since giving me my first student credit card with a $500 monthly limit about 7 years ago, I noticed as Visa dutifully and repeatedly kept upping my credit limit, without my asking, for no other reason than I had the audacity to pay my bill on time. It's gotten so out of hand that my credit limit on the card currently stands at $12,000 -- a figure that's amazing enough in its own right but all the more so considering it represents about 25% of my annual income.

I never really thought much about it (beyond some small part of me vainly thinking it was some sort of status symbol) but recent events have me worried it might be more trouble than its worth.

I've recently been trying to spend as much as possible on my credit card, for two main reasons. I'm trying to maximize my reward points (with the security of knowing I won't get into any serious debt since I pay the balance every month) and I'm also hoping to create enough of a credit history that I can get a mortgage at as good a rate as posiible in a few years. I don’t really know how nebulous things like credit scores are calculated -- the indsutry appears to thrive on secrecy -- but I generally assumed that the more debt I accumulated, and the faster I paid it off, the better I'd look to lenders.

Whatever advantages there are to having a better credit score, I'm guessing they're more than negated by having illegal charges show up on your credit card bill. The TJX and CIBC stories have me thinking, if it's this easy to get access to sensitive information like my bank account numbers, it won't be too long until I start seeing things I didn't pay for show up in my Visa account. And $10,000 worth of unused credit space every month can certainly make room for some serious purchases. I'm relatively confident that I wouldn't be paying out of pocket for any of these purchases myself, since Visa seems to accept the liability for fraudulent activity, but there's always the chance. And it's enough to have me worried.

I'm tempted to get RBC to bring my credit limit down to a more manageable level, something in the neighbourhood of $2000 a month. My question to the blogosphere is whether or not that might have any detrimental effect on my credit score.


NFtoBC said...

I believe that part of your credit score is based on how much of your available credit you are using. Thus, if you get the $2000 credit limit on your Visa card, and run it to the limit each month, your credit score would be lowered, as you are using 100% of your available credit. You might learn more by searching on the term "FICO Score"

Anonymous said...

Your credit score should go up if you lower your limits.
Your score is partially a function of capacity, higher your limit lower your capacity lower your score. Having no delqunicy on your bureau is the most important factor in your burea score, so dont miss any payments...the reason your ,limit goes up is because your score most be going up(longer you had the card, without missing payment the higher your score)the bank raises your limit to eat up your capacity so you look less attractive to other lenders and dont switch companies

Big Cajun Man said...

Credit limits count AGAINST you when you apply for a mortgage since each credit facility is counted at it's full value and thus your possible mortgage drops by about that amount.

Lowering your credit limit is fun, but not easy. MBA classes typically have it as a case study for new students (it's that much fun!). --C8j

real credit card user said...

One more important thing: do not exceed your credit limit when you are purchasing. Otherwise, you have to pay penalty fees. Do you need it?

Ell said...

Once I had exceeded my credit limit. It was my first and the only time. I am such a right credit card user. I had to pay not so large fee. But I enjoyed my shopping. It was great!

CreditBeware said...

With modern credit card terms you should always be on your guard, as banks do what they want. Check your credit limit and balance - you are sure you control everything - but they rise the interest rate.

Karen said...

Having a credit card you should always check and control your spendings. If your credit limit is exceeded it's to a credit card company's profit but it's your trouble.

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