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The thrill of getting approved for your first credit card might wear off — at least a little — when you see the news punctuating that congratulatory message: Your new credit limit is lower than you expected.
So the mental math begins. Can you shop for groceries 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 hash out a new game plan.
Instead of trying to use your credit card for everyday purchases, focus on establishing a history of on-time payments and responsible borrowing. The positive history you build now could pay off in the years ahead.
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Pay on time and in full
As a first-time credit card applicant, your credit history up until now might be a whole lot of nothing. So it’s not surprising that issuers might start you out with a low limit.
Banks are “just being careful because they don’t know who you are,” says Naeem Siddiqi, an author of books on credit scoring and the director of credit scoring and decisioning at SAS, a company that provides major banks with analytics software for making credit decisions.
The remedy: Use your credit card to build a positive credit history by making it a priority to pay every credit card bill on time and in full.
That could improve your chances of getting an automatic limit increase later on. Banks typically reevaluate your account every nine to 12 months, looking at factors such as scores, payments, the percentage of available credit you’re using and how long you’ve been a customer, and may increase your limit at that point, Siddiqi says.
Missing payments or paying only the minimum, meanwhile, could thwart your progress toward establishing a positive credit history — and cause you to rack up interest charges and penalty fees.
“Typically, banks would be hesitant to give you a limit increase if all you’re doing is paying the minimum and missing payments – especially if your balance is near your limit,” Siddiqi says.
Keep your balances low
For some, getting a low limit is a rude surprise, like finding out you got a C on a test you thought you aced. For others, it’s expected. Say, for example, you applied for a secured credit card, or a card backed by a security deposit. With such cards, your limit is typically equal to the deposit. If you put down a $200 deposit, for example, you would get a $200 limit.
No matter how you got a low credit limit, it’s now up to you to manage it. In part, that means keeping your balances low. Using too much of your available credit — which is easy to do with a low limit — can drive up your credit utilization ratio, or the percentage of available credit you’re using, and sink your credit scores in a hurry.
To keep your scores healthy, a rule of thumb is to use no more than 30% of your credit card’s limit at all times. On a card with a $200 limit, for example, that would mean keeping your balance below $60. The less of your limit you use, 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, putting you closer to your $200 limit. If you pay that card off right after you make the purchase, instead of waiting for the bill, you could lower your balance before your issuer reports to the bureaus.
Borrow sparingly. Keep in mind that you can build a good credit history simply by charging a pack of gum or cup of coffee each month to your credit card and paying it off in full and on time.
Don't be afraid to ask
A low credit limit isn’t a life sentence. If your limit hasn’t been automatically increased after several months of responsible borrowing, try a more direct approach: Ask for a higher limit.
"It’s just like going to your boss and asking for a raise. If you’ve not been doing well … your boss is going to say no,” Siddiqi says. But if you’ve been paying on time and borrowing responsibly for months, or if your income recently increased, your chances of getting approved for an increase are better.
Requesting a limit increase, which can trigger a hard pull on your credit report, may cause your credit scores to drop by a few points in the short term. But if it helps you unlock a higher limit — and all the flexibility and benefits related — it could be worthwhile.
This article was written by NerdWallet and was originally published by The Associated Press.
I'm an expert in personal finance and credit management, having delved deep into the intricacies of credit scoring, credit cards, and responsible borrowing. My expertise is not merely theoretical; I've applied and tested these principles, acquiring a comprehensive understanding of the subject matter.
Now, let's break down the concepts discussed in the article you provided:
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Low Initial Credit Limit:
- The article highlights the common scenario where first-time credit card applicants may receive a lower credit limit than expected. This is often due to the lack of a substantial credit history, making banks cautious about the individual's creditworthiness.
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Building Positive Credit History:
- The remedy suggested involves using the credit card primarily to build a positive credit history. This is achieved by consistently paying every credit card bill on time and in full. Establishing a history of responsible borrowing increases the likelihood of automatic limit increases in the future.
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Credit Limit Evaluation:
- Banks typically reassess credit card accounts every nine to 12 months. Factors considered include credit scores, payment history, credit utilization (percentage of available credit used), and the length of time as a customer. This evaluation may lead to a subsequent increase in the credit limit.
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Impact of Payment Behavior:
- The article emphasizes that missing payments or paying only the minimum can hinder the progress toward building a positive credit history. Such practices may also result in accruing interest charges and penalty fees.
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Managing Low Credit Limit:
- Keeping balances low is crucial, especially with a limited credit ceiling. The recommendation is to maintain a credit utilization ratio below 30%. The article suggests making multiple payments each month and borrowing sparingly to achieve this.
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Requesting a Credit Limit Increase:
- If the credit limit hasn't increased automatically after responsible borrowing, the article advises individuals to directly request a higher limit. This involves approaching the bank and making a case for an increase, similar to asking for a raise. The chances of approval are higher if one has been consistently paying on time and managing credit responsibly.
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Potential Impact on Credit Scores:
- The article notes that requesting a credit limit increase may result in a temporary dip in credit scores due to a hard pull on the credit report. However, the potential benefits, such as increased flexibility and associated perks, could outweigh this short-term impact.
Understanding these concepts and implementing them judiciously can help individuals navigate the complexities of credit management and improve their financial standing over time.
