How to increase credit score with a low-limit credit card

Credit cards can be pretty frustrating at times. To be approved for a credit card with a good limit, reasonable interest rates and great rewards and perks, you need to already have built a strong credit score. To build a good credit score, you need to have access to a credit product such as a credit card – which can feel a bit like a catch-22.

If you were only able to qualify for a low-limit credit card, keep reading to learn how to use that card to increase your credit score which will make it easier to qualify for better credit products in the future.

How your credit limit affects your credit score

The size of your credit limit can either help or hurt your credit score depending on how you use the credit that is available to you.

Having a low credit limit can hurt your credit score, but only if you’re using the majority of that available credit. Your credit utilization ratio accounts for 30% of your FICO credit scrore, which is one of the most popular credit scoring models on the market.

A credit utilization ratio compares how much credit you’re currently using to how much credit is available to you. Typically, the higher your credit limit is, the harder it is to have a high credit utilization ratio. You generally want your credit utilization ratio to be below 30%, but the lower it is the better. When you have a low credit limit, it’s easier to use a higher percentage of your available credit. Carrying a balance of $1,000 on a credit card when you have $2,000 in credit available to you will result in a much higher utilization ratio than if you had $10,000 in total credit limits. All types of revolving credit, such as a credit card or a home equity line of credit, impact your credit utilization ratio.

What a low credit utilization ratio indicates

Having a low credit utilization ratio signals that you can manage your credit well and don’t have a habit of overspending. Lenders who worry that you struggle to manage your credit will see you as a riskier borrower and will be less likely to offer you higher limits and lower interest rates. If you can keep your credit utilization ratio in the single digits, you’ll be in a good place.

If you have a low limit credit card and want to increase the limit so that you can improve your credit utilization ratio, you have a few options. Your first is to wait for an automatic credit limit increase. Some credit card issuers will automatically increase your credit limit if you’ve had your credit card for a while and have been using it responsibly during that time by making your monthly payments on time.

If you want to be more proactive, you can request a higher limit from your bank or credit card issuer. You can usually do this by submitting an online request or by calling the number on the back of your credit card. If you request a credit limit increase and are denied, you can always ask your credit card issuer why they denied you and what you can do to become more eligible for an increase.

You can also apply for a new credit card to increase your access to credit, although that will result in a hard inquiry on your credit report, which can hurt your credit score temporarily. Requesting a credit limit increase can also result in a hard inquiry, but automatic increases don’t require a credit check.

How to improve your credit score with a low-limit card

Now that you know a bit more about how your credit card limit can affect your credit score, let’s look at how you can actually use your credit card to improve your credit score.

Make payments on time

No matter what your credit limit is, making your payment on time every single month is the best thing you can do to improve your credit score. Your payment history accounts for 35% of your FICO credit score and is the most important factor taken into consideration by that commonly used credit scoring model.

Each month, you’ll receive a monthly statement that outlines what you purchased using your credit card (this is a good time to check for errors), how much you owe and when payment is due. When you make that payment on time, the credit card issuer will report that good behavior to the credit reporting agencies. The more on-time payments you have on your credit reports, the higher your credit score will be. Making payments on time also helps you avoid having to pay expensive late fees.

You can choose to set up automatic payments to ensure you don’t accidentally forget to pay your credit card bill. Just make sure you have enough funds in your bank account each month for the automatic withdrawal to go through.

Keep your monthly charges low

Circling back to your credit utilization ratio, when you have a low-limit card, it can be harder to keep this ratio low. It’s important to have the lowest possible balance at all times to keep your ratio from creeping up. Instead of paying your bill once a month, consider paying off your balance whenever you make a purchase. Avoiding carrying a balance can make a big difference with a low-limit credit card.

Pay the entire balance

Your credit card issuer is going to give you the option to only pay off part of your balance each month. If you pay the minimum required payment, it will count as making on-time payments, but carrying that balance will keep your credit utilization ratio higher than you would like it to be. Not to mention, you’ll have to pay interest on the remaining balance, which isn’t fun.

Bottom line

It will take time, but if you make on-time payments and keep your credit utilization ratio below 30%, your credit score will get stronger and stronger and you’ll illustrate to lenders that you can responsibly manage a credit card. Eventually, these efforts will lead to a higher credit score and a higher credit limit, which is a double win in our book.