Do credit limits affect your credit score?
A high credit card limit can seem like a good rainy day convenience, but what effect will it have on your credit score?
Your credit score is a numerical representation of your risk is a borrower. The information on your credit file helps credit providers understand how reliable you are with your credit, and what risk they're taking on when they lend to you. Your credit score, therefore, is influenced by any changes in your credit file, or any behaviour that could be calculated to be a risk. This guide will show you what effect your credit limits can have on your credit score.
What is a credit score?
Your credit score is a number representing your risk as a borrower. It's calculated by a credit reporting bureau using the information on your credit file. For example, your VedaScore, from credit reporting bureau Veda, will be a number between zero and 1200.
What credit limit information is included in my credit file?
Before comprehensive credit reporting reforms were introduced in March 2014, no information relating to your account's credit limits were included in your credit file. Now, for whatever active credit account you have or applications you've made for credit, such as for personal loans and credit cards, the following information relating to your credit limit is included in your credit file:
- The amount of credit you applied for
- The current credit limit of the account
- New and previous amount of credit
How does my credit file affect my credit score?
It's important to note that lenders can only see some information pertaining to your credit accounts. They will be able to see your credit limit and whether you have been making your repayments on time, but not how much of your credit limit you have used (as is the case with US credit files). So, a high credit limit means a higher potential for debt. This could have an impact on your credit score.
If you have two or more high limit credit cards with little debt on them, and you have no use for the limits, you should consider closing them to improve your credit score. However, your credit limit is not the only thing that is influencing your credit score, so it's important to order a copy of your credit file once a year (it's free) and check your credit score to stay up-to-date with your credit position.
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