With the new method of determining credit worthiness coming this July, is it worth / beneficial getting credit cards' limits lowered now (before 1 July)?
What do you think? Poll added.
New Credit Profiling from 1 July 2018 - Worth Lowering Credit Card Limit?
OzFrugie on 08/05/2018 - 23:54
Last edited 09/05/2018 - 08:24 by 1 other user
Last edited 09/05/2018 - 08:24 by 1 other user
Poll Options
- 0Yes-Lowering your credit card limit before 1 July
- 0Yes-But doesnt matter before/after 1 July as new method will be able to report on lower limit
- 9No-Lowering credit card limit won't do anything to credit score in new method nor in current method
Comments
only Worth Lowering Credit Card Limit if applying for a new card or loan thus giving you a better chance of getting approved I would think.
with the new method
It's better if you start with explaining in details, what was the old and what is the new method, and what is your opinion, rather than just asking a pool….people get confused easily
Unless you have some newer info, credit card limits used to only affect your maximum amount for new/refinanced loans.
Substantially for certain lenders.It does nothing for your credit score, the only change is your current credit limit availability is now factored into your possible loan servicing limit.
Here's some details of the new rules for Credit Reporting
https://www.creditsavvy.com.au/learn/credit-score/get-ready-…
Quote from the site.
"Let’s say you always repay your credit cards or mortgage on time. Previously, your credit file wouldn’t show this – it’d only show when things got bad i.e. you defaulted on a payment or went bankrupt. Now, if you apply for a loan, a lender that performs a credit check can see that you’ve paid everything on time for the past 2 years!Likewise, if you ended up closing a credit card, it will also be reflected on your credit file for 2 years afterwards, which again helps lenders get a clearer idea of your credit profile.
It could be beneficial to lower a credit limit to ensure approval for a new credit card but somehow you've got to find the money to reduce the balance before applying for a new credit card to transfer the remaining balance. It's confusing. If you've got $20,000 outstanding on a credit card and apply for another card hoping to get a $20,000 balance transfer to reduce the interest payable then on an income of $80,000 it's unlikely to be approved unless you reduce the balance to zero before applying and if you had that money you wouldn't be applying for a new credit card.
I won't be reducing any of my credit card limits. If I did I still may not be approved for a new credit card and may not be able to get the higher limit back again.
Great question!
The answer is somewhat complicated - so it heavily depends on the specifics of your individual circumstances (which is what a good rating system should be like!):
- Your percentage use of approved credit card limits is extremely important. So if you have an ongoing balance of $10,000 on a $20,000 limit, it's actually worse if you had an ongoing balance of $10,000 of $15,000..and worse still if the approved limit is $10,000 (or less!)
- Your longest held cards and accounts matter. People with no long term accounts are more risky for a variety of reasons to finance companies. So it's not necessarily good to close your oldest bank account and credit card.
- Card limits need to be considered in terms of proportionality. A person earning $50,000 a year with an average level of commitments (NDI) and a $50,000 credit limit and negligible net wealth is by most estimates high risk. A person earning $500,000 with an average NDI and a $50,000 credit limit and solid net wealth is probably low risk by most estimates.
- Depending on who your cards are with, the data to do with your previous limits will be retained. Either for a couple of years (officially) or indefinitely (likely as there are various data analytics firms that work to enrich basic credit scores and customer data with pooled data - they then sell it to finance companies - who then retain those records as a part of their IP/market intelligence. PS the value of this market intelligence is so huge that it was a hot topic in the finance industry in recent years vis a vis it was legislated largely because massive banks were (by and large) resisting the move to positive credit reporting and sharing data with new market entrants in a way to make the playing field uneven
Hope this helps.
Thanks for the insight!
Regarding #1, does it mean that if limit is 3k and consistently use 2k each month, it is worse than spending 2k but on 10k limit?
If so, then having a higher limit is better / produce a higher credit score then?? Doesn't make sense to me esp when you want to apply for a mortgage for example..
Regarding #1, does it mean that if limit is 3k and consistently use 2k each month, it is worse than spending 2k but on 10k limit?
Ceteris paribus if you had a carry over balance each month of 2k on a 3k card limit it is worse from a scoring perspective than on a 10k limit.
HOWEVER
If a 10k limit is proportionally on the big side (read: risky) for your stage of life, net assets and net income it may have more of a negative effect on your credit score than the percentage use of limit.
NB: Credit scoring systems (of which there are many) are not designed to be simple (although they should be logical). They're purposely complex to take into account millions of individual scenarios and are constantly evolving. As such, trying to express how they work in a couple of lines will be confusing. Suffice to say, basic financial logic is a great guide vis a vis pay bills on time, clear cards at the end of the month, don't move your legal address every few months (preferably aim for years), don't tear up all accounts every few months (again, aim for years), maintain stable employment, don't establish large lines of consumer credit that could be abused (like credit cards, overdrafts for example), etc.
PS Your credit score is not particularly important unless you are applying for credit. So don't get too concerned if you're not planning on applying for any in the next few years. If you are, aim to foster a profile that yells that you are financially stable and have plenty of available cash and net assets to pay the proposed debt off and chances are you'll be fine ;)
cheers mate. helpful as always!
once upon a time your limits with, say, westpac, were unknown to, say, commbank.
On a commbank application you could forget to mention westpac and commbank would be none the wiser unless the westpac account was opened within the last 5 years. and then you say "oh, that account is closed" and commbank wouldn't give two hoots.
Now, it will all be known.and commbank, or westpac, will lose a good customer…What happened 5 years ago?
How would commbank now know your Westpac account info? I thought the data sharing is still up for discussion, not implemented yet?
Your credit applications are removed from your file after 5 years. Poof it's gone from your file.
Though now if the card is still open,they'll still see it… and native they'll see closed accounts for a while too. Not sure
Whats changing? News to me.