Is this a smart way to increase my credit score / reduce utilization???

[jeboles]

I have a Secured Navy Federal Credit Card that has a $4400 spending limit.  Currently it is around $4350 used.  Would it be a good idea to pay around $500, decrease the limit by $500 and use the money I get from decreasing the limit to keep going till the card is around $500. My end goal would be to have around a $500 card limit instead of $4400, but almost no utilization

[Anonymous]

I wouldn’t do that. By reducing your limit each time you effectively keep your card maxed out and that’ll put a serious hit on your score. Keep the limit where it is and pay it down, even if it’s more slowly than $500 at a time. Each time you fall through a scoring threshold, you’ll gain 10-15 points on average.

[jeboles]

But when the card is at $500, it would not be maxed out.  It would be at 0% utilization.  Would it still be a bad idea?  As it stands right now, I am at 99% utilization, which can't be helping.  Just wanting to confirm.

[Anonymous]

Correct. But if you pay $500 to drop your balance to $3850, and then reduce your limit to $3900 and use that $500 to pay against it for the next cycle, you’re still just a few dollars under the limit (or possibly bumping into it when interest is added). You’ll only hit that 0% at the end, and you’ll be stuck with a $500 card. Meanwhile you’re dealing with a maxed out card month after month. It would be better to maintain your $4400 deposit and chip away at the balance in smaller amounts so that your UTI falls with the payments, and later on you have a useful limit to work with.

[jeboles]

OK, that makes sense.  Now another question, does a maxed out card cause score to drop month after month?  Does it rebound quickly if utilization is lowered?

[Anonymous]

It will definitely cause a score hit but it’s a one-time thing. If you lose 25 points by being maxed out (which FICO considers to be a balance at or above 88.9% of the limit), you’ll lose it the first time, and each subsequent month the maxed usage will hold it down. The beauty of utilization percentage is that it’s a snapshot - soon as it improves, scores also improve. Usage has no memory in terms of FICO.

[jeboles]

So lowering my balance to ~$3800 should result in a score boost?

[Anonymous]

It depends - is this your only open line of credit? You can gain points when your aggregate usage across all accounts falls through the thresholds (88.9/68.9/48.9/28.9/8.9%). If this is your only account, then yes since you’ll be at about 86%. If you have other accounts, your usage percentage for all accounts combined are what needs to cross these usage lines.

[jeboles]

Not my only account, but my others are almost 0.  I'll add all my other accounts up and figure out my utilization ratio from that.

[Anonymous]

Good, then you’ll know where you stand. Bear in mind, regardless of aggregate UTI, you definitely want to pay down that card - extended periods maxed out can cause issues with lenders getting spooked. Being that this is your only account with a balance, once it’s paid down, let a small balance of $5-10 report each month so you avoid the penalty for “no credit in use”.