New card limit too low? Learning to live with it is best option.

This post originally appeared June 15, 2017 on CreditCards.com as “‘Approved for a too-low-limit card; better off closing it?

By Barry Paperno

Dear Speaking of Credit,
I was approved for an American Express credit card today with a credit limit of $500. This limit is too low for me. I have several questions for you.

  1. If I were to close this account today, how low would my credit score drop (ballpark estimate)?
  2. How often can I apply for credit cards?
  3. How many cards can I apply for at one time? – Kenneth

Dear Kenneth,
Congratulations on being approved for that American Express card, albeit with just a $500 limit. I understand why you would want to close it, since that only makes common sense when you have no use for a card with such a low limit.

Yet you’re about to see why you may want to reconsider that plan.

To your first question of how much of a credit score drop to expect from closing the card, my normal knee-jerk response to similar questions is that we don’t know nearly enough about your credit to provide even a ballpark estimate.

Normally that’s the accurate response. However, this time I’ll make an exception and not only give you a ballpark number, but an exact one – zero. Surprised? Let me explain.

What if you close that new, unused card?
It sounds like you have heard about or maybe even experienced a score drop after closing a card. If so, the likely cause was the shrinking of your total available credit, thanks to the closed card’s credit limit being removed from your credit utilization percentages. Here that’s not the case. Compared to the typical account that’s been contributing to your score’s utilization calculations for years and now it’s gone, your American Express card is new and, we’ll assume, unused.

That means closing off the card’s $500 credit limit now – or if never reported as open in the first place – should leave you with the same amount of available credit impacting your score as before opening the card.

In other words, after closing that card your score should be no worse – or better – than if you leave it open.

What was the score impact of opening the new card?
While closing it isn’t likely to hurt your score, you should be aware that opening the American Express card probably did.

Since you appear to be interested in applying for more new cards, let’s look at some impacts probably brought on by that card opening. This will offer you a window into what you might expect with future new accounts:

  • Average account age. This new card’s short time on the books could have lowered your score via the “average age of accounts” and other score factors that show how long you’ve been using credit.
  • Time since the newest account opening. Having just opened the card, you’ve gone just a very short time since your last account opening – a strong risk predictor – and have likely lost some points as a result.
  • Hard inquiry. The hard inquiry incurred by American Express reviewing your credit that led to approval of the card could have taken up to five points from your score and will continue to do so for a full year from the inquiry date.

How often should you apply for cards? And for how many at once?
To your second and third questions – there are no sets of rules for how often you can apply or how many cards you can apply for at once.

However, having just seen what new account openings can do to your score, it should now be clear that protecting your score will mean no applying for cards or accepting any credit offers for as long as possible.

Fast forward one year to a limit increase
Since your score should be no better or worse from closing the American Express card, let’s look at how leaving it open and following these credit-limit-raising strategies could lead to both a higher limit and better score over the next year:

  • Use the card frequently for small-to-medium dollar amounts.
  • Keep a low balance, even if that means makinig multiple payments during one month.
  • Without fail, pay by the due-date each month.
  • Refrain from any additional new account openings.
  • Keep all other cards open and active.

While all creditors rely on their own credit limit-raising policies for recently added cardholders, a common practice is to automatically evaluate a consumer’s credit score, track record with that company, income and other factors for a limit increase after the first year.

Now, if you can just leave that card open and learn to live with that low credit limit for a little while longer, chances are you’ll be glad you did.

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