When Should You Lower Your Credit Limit?

Many people have tried to raise their credit limit, but few think of the advantages of lowering it. In fact, it can be advantageous to have your credit ceiling lowered – how often do you need to spend four times your monthly income after all?

Here are some situations where you may want to tweak that limit.

What is a credit limit?

The credit limit, or credit ceiling, is the maximum amount that can be borrowed on a single credit card. This should not be mistaken for the Monetary Authority of Singapore’s (MAS) borrowing limit (currently 12 times your monthly income).

For most credit cards, the credit limit is either two or four times the cardholder’s monthly income. Exceptions would be student cards, which are capped at S$500, or cards with no preset limits (only for high net worth individuals).

There are times, however, when you may want these limits to be lower. These are:

• When you give a supplementary card to your child

• To limit damage from identity theft

• To aid in budgeting

Scenario 1: When giving a supplementary card to your child

If you’re giving a supplementary card to, say, a teenager, it’s a good idea to impose a lower credit limit. This is especially true if your teen has never used credit cards before.

If you have a monthly income of S$4,000, for instance, handing a credit card to your teen effectively gives them S$16,000, to spend on whatever they want. That’s enough for your teen to buy a Hermes bag or an entire library of Xbox games.

It’s just not a good idea to give your child a card with a full credit limit; at least not until they’ve learned to manage their finances like an adult.

Scenario 2: To limit damage from identity theft or credit card fraud

Low credit limits are the last line of defence when it comes to identity theft. If someone does manage to steal your credit card details, and your bank holds you liable, you could face bills of up to four times your income.

If you just drop your credit limit however (e.g. decrease it to half your monthly income), it greatly limits the damage from identity theft or credit card fraud.

You might want to think about lowering your credit limit before going abroad, or into any situation where theft is a real risk. For example, you could use a credit card with a lowered credit ceiling, when exploring a new shopping site (just in case it turns out to be a scam).

Scenario 3: When you need help budgeting

If you find you always have rollover debt (i.e. credit card debt that’s not paid in full), it might be time to remove temptation. You shouldn’t have any credit card debt, regardless of how many credit cards you own.

Short of literally freezing your credit cards to stop yourself from using them (ala Confessions of a Shopaholic), lowering your credit limit is one surefire way to curb your spending.

If you need to borrow, then compare rates for the cheapest personal loan on SingSaver. Personal loan interest rates are always cheaper as compared to credit cards.

Does lowering your credit limit hurt your credit score?

The system used to calculate your credit score is secret, so we don’t know exactly how much impact lowering your credit ceiling will have. However, there is one thing we know for sure:

The main determinant of your credit score is whether you repay loans in a timely manner. The consequences of lowering your ceiling are likely to be negligible if you maintain proper financial discipline.

As we always advise, your credit card should be a mode of payment only, not an actual source of credit (despite the name). Repay the balance in full every month so you get to enjoy cashback and rewards without paying interest.