Low limit credit cards are cards issued to high risk borrowers who may struggle to pay back high credit card balances, and people who have never had credit before, such as students and teenagers. Credit limits on these cards may be as low as $200, or as high as $1000, depending on the lending policy of the card issuer and the individual credit history of the borrower.
Low limit credit cards usually charge higher than average interest rates, as the lenders have to allow for the risk of not getting their money back. A low limit credit card can help to improve your credit rating, as long as you use it wisely.
Pay off the balance each month
Use your low limit card for purchases, but never go near to or over the credit limit, and never, ever miss a payment. Both of these actions can harm your credit score, and will mean you’ll stay on that low credit limit for longer than necessary. If possible, pay off the full balance on the card each month. This will avoid high interest charges and also help to improve your credit rating.
If you can’t pay off the full balance, paying at least double the minimum amount will help to build up your credit score, as well as paying the debt off more quickly, thus saving on interest. Always paying only the minimum payment sends signals to the lender that this is all you can afford to pay, and that you may be living beyond your means.
Use the card regularly
A low limit credit card is meant to improve your credit rating, and the only way this can happen is if you use the card each month, then pay off the balance. This demonstrates a responsible attitude to credit and spending. Leaving the card in a drawer for months says nothing about your spending habits and does nothing to improve your credit reputation.
Don’t treat the card as money in the bank
Keep the low limit card at home and only use it for paying bills such as your internet provider and other essential outgoings, then pay off the balance well before the statement date. This shows you are a responsible borrower and will help to build up your credit score. Blowing the whole credit limit on the day you get the card, and then not paying off the balance in full will get you deeper into debt and will not help your credit rating.
Keep the balance down.
It’s a good idea to keep the balance at around 30% of your credit limit.* Unused credit on a low limit card – especially a large proportion of unused credit – shows you are a responsible borrower and will help to boost your credit score.
While low limit credit cards may be restrictive and expensive – particularly if you don’t pay off the balance each month – they can be a valuable tool in helping to build up or rebuild a credit rating. However, remember not to treat them as extra monthly income to spend on yourself, or your low limit credit card could land you with a very high interest bill.
Sources:
http://www.bills.com/bad-credit/
*http://www.creditcardguide.com/creditcards/credit-card-tips/bad-credit-5-tips-work-credit-ladder-133/
http://www.financeglobe.com/Finance/Articles/articles/77/1/Looking-for-a-Credit-Limit-Increase/Page1.html