You have been approved for a credit card and you feel like you have finally established yourself. You get the card in the mail and you feel let down and confused. Why have a credit card with a low credit limit? Is the card even worth keeping? Closing a credit card does not look good on your credit report, no matter who makes the decision to close it. Even a card with a low credit limit could prove beneficial.
[Read: Increase in Your Credit Limit]
Why Have Credit Card With a Low Credit Limit?
There are two good reasons to have a Credit Card with a Low Credit Limit. One is to build your credit. To build your credit means you have a lack of credit history. Nothing that you have made payments on has ever reported a payment history to a credit bureau about you. Unfortunately, the only time that utilities will report to a credit bureau is when you are late or leave a bill unpaid. This also applies to any in-house loans you may have, locally with your hardware or anywhere you do regular business and have built a level of trust. Building your credit with a credit card with a low credit limit:
- Can help you improve your credit score faster
- Can help you use the credit card responsibly
- Can limit your spending to make it easier to pay off
- Show a positive payment history (on time payments)
Eventually, all this will lead to the limit on that credit card with a low credit limit to be raised. That is the positive sign you want that you be on the right track to building good credit.
The other reason to have a credit card with a low credit limit is to rebuild your credit. The goal is to fix what was going wrong with better decisions. This is somewhat harder, but still something that can be done. It is just a matter of changing the bad habits to good ones. You have a credit card with a low credit limit now and you need to realize that this is your second chance. Whatever happened is now in the past. It is time to get to work and pull you out of the credit hole that many of us have found ourselves. A credit card with a low credit limit can be beneficial:
- Reverse that bad payment history by keeping a good one
- Keeps spending within manageable limits
- With good habits, you could have a raise on that credit limit in six months
- Make you think before you spend
Rebuilding your credit is harder than building credit because you have to prove there has been a change in spending and bill paying habits. Depending on how long it has taken and what has happened to cause the problem can be a determining factor how fast or slow the recovery. It is not an overnight process.
How to Deal with the Credit Card with a Low Credit Limit
The best way to deal with the credit card with a low credit limit is to keep your balance low on the credit card. The credit score is divided into five categories:
- Payment History
- Amount Owed
- Credit History Length
- Credit Type
- New Credit
Most financial institutions use the FICO credit score. Each of these categories in the FICO credit score carries a percentage, meaning how much that category means in the equation of your score. The payment history is 35%, the amount owed is 30%, the history is 15% and the remaining two are 10% each. This means that your payment history and the amount you owe are important when the financial institutions look at your credit history. The length of your history is important at 15% because the institutions are looking at how long you have been carrying the balances you are paying on. When you look at all this information you have to look at your credit utilization. This is the amount of credit that the financial institutions look at when deciding to extend you credit. If your credit is too high (above 30%) you are considered a high risk and are unlikely to receive the credit asked for.
Learning how to calculate the credit utilization is easiest if you use the credit card with a low credit limit billing statement. The balance and credit limit should be present on the billing statement. Divide the credit card balance by the credit card limit, then press equal. Now multiply by 100. An example would be . This cardholder credit utilization is too high, therefore too risky for extension of credit.
How To Raise the Limit on the Credit Card with a Low Credit Limit
The idea for both the credit card company and the cardholder is to build a financial history together. Once the cardholder has established a positive record of accomplishment of payments, the credit card company will review the file and determine how much of an increase they will give the cardholder on their credit card with a low credit limit. Sometimes this is automatic at six months but one late payment can prevent this from happening. If the cardholder has made payments on time and there has not been an increase, then he or she may contact them and ask for one. There is two way you can do this:
- Through their website
- Call their customer service
When a determination is made, a letter is sent in the mail. If you are denied, they have to tell you why. This gives you a goal to improve. Consistently using positive credit card habits and not giving up will eventually get you the rewards you desire. Credit cards with a low credit limit will raise the limit as long as you continue to make your minimum monthly payments on time. Another way is to make more than the minimum payments or full payments on your credit card on or before the due date to raise your credit score.
Overall, the best way to use a credit card with a low credit limit to your advantage is to use it responsibly by paying on time, paying the minimum payment, if not more and sticking to good habits to become credit worthy.
How Can I Raise The Credit Limit On My Credit Card? – Credit Card Insider: