How to Improve Your Credit Score with a Low Limit Credit Card

Credit cards can be quite disappointing at times. To be approved for a credit card with a good limit, reasonable interest rates, and great rewards and perks, you must already have a strong credit score. To build a good credit score, you need to have access to a credit product like a credit card, which can be a bit like a catch-22.

If you were only able to qualify for a low-limit credit card, keep reading to learn how to use this card to improve your credit score, making it easier to get better credit products in the future.

How does your credit limit affect your credit score?

Your credit limit can either help or hurt your credit score, depending on how you use the credit available to you.

A low credit limit can hurt your credit score, but only if you use up most of your available credit. Your credit utilization rate is 30% of your FICO credit score, which is one of the most popular credit scoring models on the market.

The credit utilization ratio compares how much credit you are currently using with how much credit is available to you. Generally, the higher your credit limit, the harder it is to have a high credit utilization ratio. As a general rule, you want a credit utilization rate below 30%, but the lower it is, the better. When you have a low credit limit, it’s easier to use the higher percentage of available credit. A $1,000 balance on a credit card when you have a $2,000 loan will result in a much higher utilization rate than if you had a total credit limit of $10,000. All types of revolving credit, such as a credit card or a home-secured line of credit, affect your credit utilization rate.

What does a low credit utilization rate indicate?

A low credit utilization rate signals that you can manage your credit well and do not have a habit of overspending. Lenders who worry that you are struggling to manage your credit will view you as a riskier borrower and are less likely to offer you higher limits and lower interest rates. If you can keep your credit utilization ratio in single digits, you’ll be in a good place.

If you have a credit card with a low limit and want to increase the limit to improve your credit utilization rate, you have several options. The first is to wait for the automatic increase in the credit limit. Some credit card issuers automatically increase your credit limit if you use your credit card for a period of time and use it responsibly during that time by making your monthly payments on time.

If you want to be more active, you can request a higher limit from your bank or credit card issuer. This can usually be done by submitting an online request or by calling the number on the back of your credit card. If you request a credit limit increase and are denied, you can always ask your credit card issuer why they denied you and what you can do to qualify for more increases.

You can also apply for a new credit card to expand your access to credit, although this will result in a hard call on your credit report, which can temporarily damage your credit history. A request for a credit limit increase can also result in a hard request, but an automatic increase does not require a credit check.

How to Improve Your Credit Score with a Low Limit Card

Now that you know a little more about how your credit card limit can affect your credit score, let’s take a look at how you can actually use your credit card to improve your credit score.

Make payments on time

Regardless of your credit limit, paying every month on time is the best thing you can do to improve your credit score. Your payment history makes up 35% of your FICO credit score and is the most important factor in this widely used credit scoring model.

Each month, you’ll receive a monthly statement stating what you’ve purchased with your credit card (this is a good time to check for errors), how much you owe, and when the payment is due. When you make this payment on time, the credit card issuer will report good behavior to the credit reporting agencies. The more timely payments on your credit reports, the higher your credit score will be. Paying on time will also help you avoid costly late fees.

You can set up automatic payments so you don’t accidentally forget to pay your credit card bill. Just make sure you have enough funds in your bank account each month for automatic withdrawals.

Keep your monthly payments low

Going back to your credit utilization rate, when you have a low limit card, it can be harder to keep that ratio low. It is important to always have the smallest balance possible so that your odds don’t go up. Instead of paying your bill once a month, consider paying off your balance every time you make a purchase. Avoiding balance can go a long way with a credit card with a low limit.

Pay the entire balance

Your credit card issuer will give you the option to pay off only a portion of your balance each month. If you make the minimum required payment, it will be considered a timely payment, but keeping that balance will keep your credit utilization ratio higher than you would like. Not to mention that you will have to pay interest on the remaining amount, which is not very fun.

bottom line

It will take time, but if you make timely payments and keep your credit utilization below 30%, your credit score will get stronger and stronger and you will demonstrate to creditors that you can manage your credit card responsibly. In the end, these efforts will result in a higher credit score and a higher credit limit, which we believe is a double win.