The maximum amount of money you can charge on a credit card is your credit limit. Lenders usually tailor the credit limit on your credit card to your financial situation after reviewing your credit report,…
The maximum amount of money you can charge on a credit card is your credit limit. Lenders usually tailor the credit limit on your credit card to your financial situation after reviewing your credit report, credit score, income and other factors.
Each lender weighs these factors differently depending on its particular requirements, which can result in different credit limits for different credit cards. Some cardholders are only approved for a low credit limit, while others are approved for a higher one.
Even though it may seem counterintuitive, you might not want a high credit limit and the stress it can bring. “I think low-limit credit cards offer many benefits for some consumers and are underutilized,” says Leslie H. Tayne, author of “Life & Debt” and debt resolution attorney and founder of the Tayne Law Group in New York.
The Appeal of Low-Limit Credit Cards
“Low-limit credit cards are often a good option for people who have no credit history or damaged credit history,” says Michelle L. Black, credit expert and founder of HerCreditMatters.com. These credit cards give you the opportunity to prove you can manage credit by making on-time payments and managing your credit limit.
“Due to the lower limits, there is less risk involved for the issuing bank,” says Black. If you default on the credit card, the lender won’t be out thousands of dollars like it could be with someone who has a high credit limit and maxed out their credit card before defaulting.
Tayne says, “One of the appeals for consumers who have difficulty controlling their spending is that they can request a low-limit card so they can stay within budget.” You can use a low-limit credit card to manage a specific area of your monthly budget, such as your grocery spending. If you only charge your groceries to the card, you’ll be able to quickly look up how much you’ve spent in any given month.
Credit cards can be great tools. Some credit cards offer useful benefits such as price protection, extended warranties and cellphone protection. A low-limit credit card can give you access to these benefits without the potential to run up a large debt.
Low-Limit Credit Cards Come With Limitations
The limitations of credit cards with low credit limits can end up causing more headaches than you might think. It’s easy to damage your credit score with a low-limit credit card. The amounts you owe account for roughly 30 percent of your FICO credit score. Your credit utilization ratio on revolving accounts, which is the amount you owe on your debt divided by your credit limit, is a major factor for this part of your score.
Your credit score can be damaged when your credit utilization ratio gets too high. In general, you should aim to keep your ratio below 30 percent. But keeping your debt to under 30 percent of your credit limit is more difficult when your credit limit is low. For example, it’s not difficult to spend more than $150 in a single grocery shopping trip for a four-person family. If your credit limit is only $500, a grocery trip can put you over that 30 percent recommendation.
Low credit limits can sometimes result in extra fees. For example, it’s easy to buy something that increases your total balance above your credit limit. Some credit cards won’t reject the purchase even though it puts you over your credit limit, says Tayne. If you’ve opted in to an over-limit protection program, your issuer can approve the purchase and charge a fee, typically $25 to $35.
Credit cards with low limits can make managing your finances a more frustrating process, too. You may prefer to put every purchase on a single credit card to track your spending. Low limits can force you to make multiple payments each month to free up enough credit to continue making purchases.
You might not need to apply for a new card to get the low-limit credit card you desire. Instead, you can call your current credit card company and ask it to lower your limit to a more comfortable amount.
Another option is applying for credit cards that typically come with lower credit limits. “Starter or subprime credit cards tend to come off the shelf with lower limits,” says Black. Secured credit cards come with low limits but require a security deposit to open the account.
People with excellent credit don’t have to apply for a subprime, secured or bad credit credit card to get a low credit limit. You can always apply for a credit card targeted to those with excellent credit scores and ask for a lower limit. “I’m a big fan of calling credit card companies because I feel like I can ask questions,” says Tayne.
Many credit cards still allow you to apply for a new card over the phone. When calling, you can ask the representative whether you can request a particular credit limit during the application process. If that isn’t possible, you can always ask to lower your credit limit after you’re approved, says Black.
Best Practices to Manage Low-Limit Credit Cards
After you get one or more low-limit credit cards, you need to manage them effectively, which is especially important to improve your credit score.
The most important thing you can do is to make every payment on time. Your payment history is the largest factor in your credit score, accounting for roughly 35 percent. Setting up payment reminders or automatic payments for the minimum payment due are great ways to avoid missing a payment, says Tayne. Even with an automatic minimum payment option enabled, you can always make an extra payment to pay off the remaining balance.
In addition to paying on time, you need to keep a close eye on your credit utilization ratio. Do your best to avoid having a high utilization ratio reflected on your credit report. In general, the statement closing date is when the card issuer sends a snapshot of your balance to the credit bureaus, says Black. You can manage your utilization ratio by making a payment to reduce your balance before your statement is issued. Doing this helps improve the second-largest factor that impacts your credit score.
Having a credit account closed can negatively impact your overall credit utilization ratio and your length of credit history. “Make sure you’re using the card once per quarter so the card issuer doesn’t close it for inactivity,” says Black. To avoid this, consider using your credit card as the primary payment method for a monthly bill, such as an online streaming service or a gym membership.
Some issuers will increase your credit limit after you show you can manage a low-limit card. Credit card companies don’t have to tell you they’re increasing your credit limit. However, you’ll usually notice if you pay close attention. You might receive a separate notice in the mail, or a message may be printed on your credit card statement notifying you of the change. Another easy way to monitor your limit is looking for the credit limit line item printed on each statement.
After you’re comfortable managing low-limit credit cards, you may decide to move on to higher-limit cards. You can continue to use the same systems to manage your higher credit limits. Pay special attention to maintaining good credit habits when making the transition. Don’t forget, you can always cancel a card or reduce your credit limit if you feel you need to cut back.