When should I change activity level??

I started MFP about 6 months ago and I had my activity level set at sedentary. Now that I am working out, I still have it set at sedentary because I only run 4 days a week. I'm a SAHM, so on my rest days, I'm lucky if I get 3000 steps in.

Each 1-2 lbs I lose, MFP subtracts like 30 calories from my allowance. Now that I'm down to 190, my allowance is approaching 1200/day. I'm pretty sure I'd go crazy trying to eat that low (I have been going over my calories more often than I'd like as it is), especially since I still have like 40lbs to lose. It's not a problem on my run days, since I typically eat back half of my calories.

So now I'm confused. Do I change my activity level to lightly active or more and ignore my exercise calories? Or should I keep it the way it is.

I don't have a HRM, so my calorie burns are estimated by my fitbit. So I'm not sure how accurate they are.

Sorry if this seems all over the place!