Is having a low credit limit bad for your credit?

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shoptalk01
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Is having a low credit limit bad for your credit?

Postby shoptalk01 » Thu Aug 02, 2012 2:33 am

I haven't had a credit card for several years, but I recently applied for one so I could get my credit built back up. Problem is the card they sent me only gives me a credit line of $500 and has a fairly steep annual fee. It's a major credit card that reports to the credit bureaus monthly. The plan was to charge only a small amount that could easily be paid off and get it paid off quickly. At the present, I could easily pay off a $500 balance.

Here's the problem, needed new lenses for my eyeglasses which cost a little over $400. That and my $59 annual fee caused my first bill to be $478. I paid it off in full before the due date, but a friend of mine said my credit score would take a hit for using that much of my available credit. The way he has it figured I should only be spending $90 or so.

Is there really a point in having a card with such a low limit that you can't even fill your tank with gas without using too much of your available credit? Does charging $50 a month and paying it off really do anything for your credit?


hematino
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Postby hematino » Thu Aug 02, 2012 10:36 pm

The simple fact of the credit limit being so low doesn't affect your credit score. It's the problem of utilization that comes with it which does the damage. When you charge $400 to a card with a $500 limit, it looks like you are almost maxed out (80% utilization) as opposed to charging the same amount on a card with a $2000 limit (only 20% usage). Too high of a utilization ratio is not good-- so how much is too much? It is hard to pinpoint an exact percentage everyone can agree on as being too high, but usually it is recommended to stay under 20% if at all possible. Keep in mind that utilization accounts for nearly 1/3 of your FICO score, so it carries a bit of weight.

Regardless of the small limit, regular and responsible usage will still boost your credit.

If you charge an amount like the $478 you mentioned on your $500 limit card, and then pay off the balance before the credit card company's reporting date (when they report your monthly balance to the credit bureaus), then the high utilization rate you temporarily had will not affect your score, as it was not reported. Be aware though that the reporting date is not necessarily the same as the billing due date, and can be hard to figure out unless you subscribe to a credit monitoring service. If you're worried about your score dropping due to usage, the best thing you can do is exactly what you did.... pay it off quickly to raise your chances of the high utilization rate not being reported. If it does get reported, it should bounce back after a month or so, once the creditor reports again and your balance has been reduced.

Hope this helped some!
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shoptalk01
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Postby shoptalk01 » Fri Aug 03, 2012 11:43 am

So then how would charging say $50 each month and paying it off compare to just plain putting the card away and not using it? Seems kind of silly to charge something I could pay cash for.....

The whole thing is I have a prepaid card I can use to order online and buy gas at the pump after hours and it let's me spend $500 if I have it whereas if I let my gas tank get empty, I would use too much of my available credit to fill it one time.

I know my credit is bad, I lost my job, was without a job for over a year, couldn't get unemployment - The only thing I had of value was the cheap starter house I was living in, wasn't worth much or in very good shape but ended up putting it up for sale to get some money because I was completely out of money. Had to use a couple of my cards to keep the heat and electric from being turned off in the middle of winter and pay the taxes. Before I could find a buyer my cards went into default and the accounts were charged off, nothing I could do, no money, didn't even know how I was going to eat. Finally got the place sold, then a few months later a Temp agency finally found a decent assignment for me.

Right now I'm living out of Motels almost paying out more than I'm making in rent. I tried to get into several apartments but got turned down because of bad credit. I tried for a bunch of credit cards to try to get my credit built back up so I can get out of this dump, but this is the only one I got approved for. It was the last resort before trying for a secured card, but it seems like a really crappy deal, on the surface, prepaid is a better deal, but this thing is supposed to help build credit. I guess I should consider myself lucky I was able to open a checking account at a local bank. About all I can do now is either use my mom's address for a physical address or I get some of my mail at the UPS Store - I was able to rent a box there.

By the way, I needed to get my eyeglasses replaced for the last 6 months, I was having trouble seeing, made several mistakes and I was given the choice to have my eyes checked or be terminated from the little bit of a job I have.



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