How to live with your first credit card limit
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? 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.
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 re-evaluate 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 towards 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.
For some, getting a low limit is a rude surprise, like finding out you got a C on a test you thought you had 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 US$200 deposit, for example, you would get a US$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 utilisation 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 per cent of your credit card’s limit at all times. On a card with a US$200 limit, for example, that would mean keeping your balance below US$60. The less of your limit you use, the better.
To keep your balance low, make multiple payments each month. Your credit utilisation ratio is based on what your balances are when your issuer reports them to the credit bureaus each month. Suppose you spend US$80 on groceries on your card, putting you closer to your US$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.
And 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.
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.