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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.
In the realm of credit scoring and responsible borrowing, I've delved deep into the core principles that guide credit card issuers and the factors influencing credit limits. My expertise spans from understanding how credit history shapes initial credit limits to strategies for boosting those limits over time.
Firstly, let's address the concept of credit limits. A credit limit is the maximum amount a credit card issuer allows a cardholder to borrow. It's determined by various factors, including the individual's credit history, income, and the type of card applied for. When someone receives a credit card with a lower limit than expected, it's often due to a lack of established credit history or applying for secured credit cards where the limit is linked to a security deposit.
The crucial strategy to enhance and manage credit limits revolves around responsible credit card usage. Making timely and full payments is paramount. It not only establishes a positive credit history but also sets the stage for potential automatic limit increases in the future. On-time payments, coupled with responsible borrowing behavior (keeping balances low and not maxing out the available credit), are key elements for banks when considering limit increases.
Maintaining a low credit utilization ratio is pivotal. This ratio, reflecting the percentage of available credit being used, heavily impacts credit scores. Keeping credit utilization below 30% is a general guideline for maintaining a healthy credit profile. Techniques like making multiple payments throughout the billing cycle and borrowing sparingly, even for minor expenses, aid in achieving and sustaining a low balance.
Finally, requesting a credit limit increase is a viable option after establishing a reliable repayment history. However, it's akin to asking for a raise—it's more likely to succeed if there's a track record of responsible credit use or an increase in income. While this request might initially cause a slight dip in credit scores due to a hard inquiry, a higher limit can provide more flexibility and potential benefits in the long run.
This advice aligns with industry practices and insights from experts in the field, such as Naeem Siddiqi, who specializes in credit scoring and decision-making processes for major financial institutions. It's crucial to view credit card usage as a tool for building a positive credit history rather than solely for everyday expenses, especially when starting with a lower credit limit.
