How to live with the low limit on your first credit card

The thrill of being approved for your first credit card may subside – at least a little – when you see the news punctuate this congratulatory message: Your new credit limit is lower than you expected.

Mental arithmetic therefore begins. Can you shop for a full month without flying too close to your limit of, say, $ 500? Is it even possible to pay for a plane ticket? If the answer is a resounding “no”, it’s time to craft a new game plan.

Instead of trying to use your credit card for your daily purchases, focus on building a history of on-time payments and responsible borrowing. The positive story you are building now could bear fruit in the years to come.

Pay on time and in full

As a first-time credit card applicant, your credit history so far could be very low. It is therefore not surprising that issuers can start with a low limit.

Banks “just pay attention because they don’t know who you are,” says Naeem Siddiqi, author of credit scoring books and director of credit scoring and decision making at SAS, a company that provides credit scoring and decision making. to large banks, analysis software for credit decisions.

The fix: Use your credit card to build a positive credit history by making it your priority to pay every credit card bill on time and in full.

This could improve your chances of getting an automatic limit increase later on. Banks typically re-evaluate your account every nine to 12 months, looking at factors like scores, payments, what percentage of available credit you’re using and how long you’ve been a customer, and may increase your limit at this point. , says Siddiqi. .

Missing or paying only the minimum payments in the meantime could hinder your progress toward building a positive credit history – and cause you to accumulate interest charges and penalties.

“As a general rule, banks would be reluctant to give you a limit increase if all you do is pay the minimum and the missing payments – especially if your balance is near your limit,” Siddiqi says.

Keep your balances low

For some, getting a low limit is a nasty surprise, such as finding out that you got a C on a test you thought you had passed. For others, it is expected. Say, for example, you applied for a secure credit card, or a card backed by a security deposit. With such cards, your limit is usually equal to the deposit. If you deposit a deposit of $ 200, for example, you will get a limit of $ 200.

No matter how you got a low credit limit, now it’s your turn to manage it. Part of that means keeping your balances low. Using too much of your available credit – which is easy to do with a low limit – can increase your credit utilization rate, or the percentage of available credit you are using, and reduce your credit scores hurry.

To keep your scores healthy, a rule of thumb is not to use more than 30% of your credit card limit at any time. On a card with a limit of $ 200, for example, that would mean keeping your balance below $ 60. The less you use your limit, the better. Here’s how you can keep your balance low:

  • Make multiple payments each month. Your credit utilization ratio is based on what your balances are when your issuer reports them to the credit bureaus each month. Suppose you spend $ 80 on groceries on your card, which gets you closer to your limit of $ 200. If you pay for this card right after making the purchase, instead of waiting for the bill, you can reduce your balance before your issuer shows up at the office.

  • Borrow sparingly. Keep in mind that you can build a good credit history just by loading a packet of gum or a cup of coffee each month onto your credit card and paying it off in full and on time.

Don’t be afraid to ask

A low credit limit is not a life sentence. If your limit hasn’t automatically increased after several months of responsible borrowing, try a more direct approach: Request a higher limit.

“It’s like going to your boss and asking for a raise. If you’re not doing well… your boss will say no, ”Siddiqi says. But if you pay on time and borrow responsibly for months on end, or if your income has increased recently, your chances of getting a raise approval are better.

Asking for a limit increase, which can put a lot of pressure on your credit report, can lower your credit scores by a few points in the short term. But if it helps you unlock a higher limit – and all the flexibility and perks that go with it – it might be worth it.

This article was written by NerdWallet and was originally published by The Associated Press.

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