Can Reducing A Credit Card Limit Help Your Refinance Goals?

Question: HI Darrin, Just like everyone I know, I’ve got a fistful of credit cards.  I’m thinking about refinancing my mortgage right now.  If I call my credit card companies and ask them to reduce my credit limits, will it help my refinance goals. maybe get me a better interest rate?  I’m looking for the best rate I can get, but I don’t know the best way to pull it off. Thanks, Robert

Answer: Hi Robert, That’s a great question for a couple of reasons…

First, you’re not at all unusual for having a lot of credit cards.  Some people collect credit cards like others collect stamps or even rocks.  While your credit limit comes into play when determining your creditworthiness, the way you utilize the credit you have is even more important.

In order to achieve your refinance goals, you’ve got to first think like a lender.  All lenders are interested in how much you currently owe in relation to your credit limit.  For instance, if your credit limit on a credit card is $2,000 and you’re currently carrying a balance of $1,200, you owe about 60% of your available credit to your lender – leaving 40% available.  If you ask your credit card company to reduce your credit limit to $1,500, that would mean that you are down to having 20% of your available credit for additional spending.  

Lenders don’t like seeing such a heavy utilization of available credit – and neither do credit reporting agencies.  They prefer that you owe less than 40% of your borrowing capacity, so a better tactic would be to reduce the balance you have on the card.

Your credit score will improve by having a better utilization of credit on your card.  At the same time, reducing your credit limit with such high balances will hurt your credit score, which is obviously not in your best interest when trying to get a good refinance rate.

Here’s an additional thought, though.  If you are free of the burden of credit card balances, you can improve your credit score – and reduce your interest rate on a new loan – by reducing credit limits on the cards you have or closing an account or two that you don’t use.

The reason is simple: Available credit creates the capability to spend, which can impact your ability to make your mortgage payments on time.  You may have no intention of spending any of your available balance, but your lender doesn’t know that.  They have to take a more conservative approach and assume that you could spend the available credit, which would theoretically make it more difficult to make your payments on-time.

This is what you’re looking at, Robert.  So do the best thing for you depending on your circumstances.  The best loan at the best rate will give you the best possible financial outcome.  You’ll get a loan you’ll love with more affordable payments.  Then your refinance will help your financial situation and help you to more quickly reach your refinance goals.

All the best!

Darrin Roseborsky

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