How Is Your Credit Limit Affecting Your Credit Score?

While it may not appear to be the most obvious factor affecting you credit-score, it’s important to understand how your credit limit impacts your rating.

What is your credit limit?
The credit limit on any account is the maximum amount you can borrow.

If you use all of the credit available to you through that account, you must pay down the loan in order to draw more money from it.

Commonly, it is assumed that the “payment history” portion of your credit report is what determines the quality of your rating, however, this overlooks the second most important category: “amounts owed”.

The “amounts owed” category is responsible for 30% of your rating. This means that the more you borrow, the higher risk you become.

Imagine you have a credit limit of $1000. If you use $1000 of your credit, it appears that you are using more credit than you have physical cash. If you use only 30-35% of your limit ($350), lenders will see that you use your credit responsibly, and can afford to pay back what you borrow.

It’s important to keep the ratio of borrowed credit to available credit as low as possible.

“That’s not a problem for me, because I always pay off my balance in full.”
That’s great! However, this practice won’t always protect you from a low rating.

Sometimes, the lenders might report what your “amount owing” is to the credit bureau before your full payment is received. When this happens, the computer only detects your debt, without recognizing that the balance has been paid – thus spitting out a lower score.

Tip: If you’re in the habit of primarily using your credit card for purchases and paying it off at the end of the month, try making more frequent payments throughout the month to keep the balance low, or request a credit increase to keep the ratio of borrowed to available credit, low.

Just remember, how you use you credit limit will be reflected in your credit score!

For more information, visit www.creditsave.ca