Should credit limits be reduced?

I recently got a limit increase from $500 to $7,500 on my credit card. I know I won’t come close to spending that much in a month, but I’m wondering if there’s any reason I should ask about reducing it to $2,000 or something lower?

There are several benefits and relatively few drawbacks to having a higher credit limit. On the positive side, a higher credit limit means you’ve got more of a buffer in the case of an emergency. You might not envision spending more than $2,000 in a month now, but future you might want that extra money. Sometime in the future you might need to make expensive car repairs or want to take a trip. You might find yourself wanting to replace your phone or book an airline ticket on short notice.

Hopefully you won’t run into surprises like these and you’ll be able to budget for them in advance. However, life has a way of surprising us. Having a higher credit limit will help you deal with those surprises in the future.

Another reason to maintain a higher borrowing limit is it will help your credit score. One part of a credit score calculation examines the ratio of credit utilized versus your limit. Put more simply: if you are using a smaller percentage of your credit limit, your score goes up. Using $250 of your $500 limit gives you a low ratio of 1:2. Using $250 of $7,500 gives you a ratio of 1:30, which is much better.

Typically the only reason to not maintain a higher credit limit is if you will be tempted to use it frivolously. If you think your will power might crumble and you’ll be inclined to rack up a debt on your credit card you cannot pay back at the end of the month, then that’s a good reason to keep the limit lower. People who struggle with impulse control are wise to maintain a lower credit limit. However, if you’re self-disciplined when it comes to managing your finances then there is no down-size to accepting the higher limit.

It might also be worthwhile turning the question around. Why would you want to have a lower credit limit? If there is a concern there about spending habits or the temptation to spend, then I can understand wanting to lower the limit. Otherwise it’s perfectly healthy to let your credit limit rise and have your credit score rise with it.