Will Lower Credit Card Limits Improve My Credit Score?

Q I have several credit cards and I usually pay my statement in full when I get my bill. The cards' credit limits are from $5000 to as high as $16,000. Will it help my credit score if I ask to lower my cards' limits? My credit score is in the low 700s, and I am shooting for a 750 or higher since I plan to refinance or modify my home loan. Is it better not to cancel any of my credit cards as long as I either don't use them or pay them in full monthly?

A As crazy as it may seem, for someone who handles their credit cards as responsibly as you, it does not make sense to lower your credit limits. If you reduce you credit limits it will likely cause your credit score to fall, not rise. Here's why: One of the biggest factors in determining your FICO score - accounting for 30 percent of your score - is your credit utilization ratio. That's a fancy name for a simple concept: how much of your available credit you have tapped in a given month. (Even if you pay off your balance each month, the balance due on each statement is reported to the credit bureaus monthly.)

Let's say you have three cards with credit limits of $5000, $10,000 and $16,000. Your total available credit is $31,000. Now let's say that this month you had $3000 in charges. That works out to a credit utilization ratio of 9.7 percent. But what if you instead asked that your credit limits be cut? If your new combined credit limit is now $12,000 and you spend the same $3000, your utilization rate jumps to 25 percent. If you have some extra expenses one month and your spending hits $4500, your utilization rate would be 37.5 percent.

While there is no hard-and-fast rule about what is a good or bad utilization rate, lower is always better. A 10 percent rate is better than 20 percent, which is better than 30 percent, etc. So for that reason, I wouldn't recommend reducing your credit limits.