Do low limit credit cards help improve credit?
Credit cards are a necessary factor in maximizing your credit profile. While paying mortgage and car payments can help your credit score, these types of payments do not communicate your reliability in paying your obligations as much as credit cards. Credit card debt is unsecured collateral, meaning you will not lose anything tangible by failing to pay these debts.
Credit cards can have limits as low as $300 or as high as $50,000 and even higher). Credit card companies generally report to the credit bureaus on a monthly basis. They report your available credit, current balance, and your payment status (paid as agreed, 30 days late, etc.).
Whether low limit credit cards affect your credit depends on your circumstances. People with a few moderate-limit credit cards with long, solid payment histories and no late payments have the higher credit scores. If you are trying to build your credit, this situation should be your long-range goal.
If you already have a few credit cards, establishing a new credit account with a low credit balance will probably not help and could hurt you. You would be better off to request a credit increase from your existing cards. This will keep you from having a new account on your report, which could lower your score. The average age of your accounts figure into your credit score. Having too many credit cards can also lower your score.
Having several credit cards with lower limits is a red flag to the credit bureaus. It could mean you are desperate to take on new credit because you are having trouble living within your means. It could also lead to you having too much available credit in the future. This may not be true in your case, but this is how the credit bureaus see it.
One important factor in determining your credit score is the amount of your available credit you are using. If you have $300 in available credit, you need to keep your balance lower than $100. Whenever you use more than 1/3 of your available credit, your score can be negatively affected. This could be difficult if all your credit cards have lower limits. Even if you pay your cards off every month, the credit card company will report your balance as of the day of the reporting. This means the credit bureaus will not necessarily know you are paying off your card every month, especially if you run your bill up close to the maximum every month before paying it off. This can be easy to do with a low credit limit.
It would be easier to keep your balance down to one-third your available balance on a credit card with a limit of $1000 or more. To build credit, treat it as a $300 limit credit card. This will boost your credit score and make it easier to get credit increases, assuming you make your payments on time every month.
While low limit credit cards usually do not help build credit, there are exceptions. If you are trying to build your credit from scratch, you may have to start with low limit credit cards. In this case, start with three or less. Use approximately 1/3 of your available credit, and make on-time payments every month. Make payments that are higher than the minimums. Some credit providers automatically give you credit increases over time. If not, request credit increases once every six months. Do not apply for additional credit cards during this time. Stick with the first three until your credit limits are at least over $1000 and with at least one over $3000.
Once you have moderate limits, you could potentially apply for one or two more cards and follow the same procedure. However, you can build an exceptional credit profile with a high score using only three cards. The credit scoring system involves complicated algorithms that can be sensitive when it comes to the number of accounts you have, your total available credit, and your average monthly balances. You don’t need several credit cards to build credit. If you must have a low limit card, get it with the plan to increase the limit over time. Credit scores are largely based on long-term factors. You can’t build it more quickly by having several low-limit cards. Build your credit slowly and steadily with a few credit cards, and the rewards will come.