Less is More: Low-Limit Credit Cards Can Help You Build or Rebuild Credit
Diving into the world of credit cards can be daunting for those new to the game, such as young people trying to establish a solid credit history or older folks who’ve shied away from using plastic to pay for everyday purchases. You might wonder how much credit you actually need, how disciplined you’ll be in paying off the balance each month (a must!), and whether or not a too-high credit limit will tempt you into buying goods and services you really don’t need or – more importantly – can’t actually afford.
These are all valid concerns when it comes to securing a credit card, and they must be considered and taken seriously. One way to avoid these and other issues is to sign up for a credit card with a limit of between $300 and $1,000. This is a good way to dip your toe into the world of credit cards. You can use your card to start building (or rebuilding) credit, with less worry about getting into mountains of debt. Lower-limit cards are also a good choice if you worry about overspending. And they may be a bit easier to get if you don’t have a long credit history: A lower credit line means less risk – and that means banks might be more willing to work with you.
Think a low-limit card is right for you? Here’s how to find one:
- Ask for a lower limit on your existing card(s). If you have existing credit cards with limits that tempt you into spending more than you should, call your issuer and ask them to lower your limit. When you opened the account, your credit card lender set the limit based on your financial qualifications, including your credit score, credit report, and income (among other factors). They likely also pushed that limit as high as they could justify. However, you have every right to ask them to lower it if that figure isn’t working for you, and you don’t have to give a reason for the request. There’s no guarantee they’ll do it, but it doesn’t hurt to ask. Also, be sure to remember that if you have a balance on this card, reducing the limit will also increase your credit utilization (which may reduce your credit score).
- Specify a low limit when you apply for a new card. Not all cards allow you to select a credit limit at the time of application. Check the form for this option, and only go for those companies that offer this. But be aware that while receiving a low limit at the time of card issuance may be great for your current situation, if things change financially and you ever want to up the limit in the future, it will require your lender to pull your credit report again, which would temporarily ding your score.
- Use a credit union, independent bank, or community bank. These types of smaller financial institutions might be more flexible and more open to letting you choose a credit limit that works for you.
- Go basic. Simple credit cards – with no rewards, travel perks, balance transfer deals, or any other extras – usually come with low limits. Same goes for “starter” or “first-time” credit cards, aimed at younger customers or customers with limited credit histories. Look for these types of cards when deciding what type of plastic to apply for.
Making the Most of a Low-Limit Card
Once you have your low-limit credit card in hand, it’s critical that you use it responsibly. Most importantly, make sure you pay off your balance in full each month. This will slowly but surely raise your credit score – and make it easier for you to do things like apply for a mortgage, qualify for lower interest rates, and other perks.
Here are a few other things to keep in mind if you think a low-limit card might be for you:
- Keep your balance low. Part of your credit score is based on your credit utilization ratio, which means the amount of credit you have available vs. the amount of credit you’ve used. This is important for any credit card user, but it’s especially important if you’ve got a lower balance. For example, a $200 balance on a card with a limit of $5,000 is only 4% usage. But a $200 balance on a card with, say, a limit of $500 is a whopping 40% – nearly half of your available credit!
- Take note of your interest rate. Because low-limit credit cards are typically issued to users with limited or less-than-perfect credit, they often have higher interest rates. If you pay your card off in full every month, this shouldn’t be an issue. But it’s good to keep this in mind if an unforeseen emergency causes you to carry a balance.
- Consider a secured card. Traditional credit cards are “unsecured” – they’re not backed by a cash deposit. This can make them hard to get if you’ve got zero credit history (or a few serious financial missteps in your past). If you get turned down for a traditional low-limit card, you can apply for a secured card. Secured cards typically have lower limits, and, unlike traditional cards, they require you to put down a cash deposit. But your spending and payment activity on a secured card will go on your credit report, which means they can help you boost your score.
In conclusion, if you’ve never had a credit card, if you want one to help put you on the road to a better credit score, of if you simply want to help keep your spending on track, a low-limit card just might be right for you.
But as with any credit card, no matter how low the limit, using it properly and responsibly is the final word in good money management. If you need help getting there, the friendly team at American Credit Foundation is always happy to help!