Credit cards are common forms of payment used by many Americans. Every credit card has a spending limit that determines how much credit you are given. There are many different kinds of low limit credit cards, and just like a bank account, once the limit has been reached, you cannot charge too much more over your account.
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Just like when you go over your limit on your bank account, going over the limit of any credit card includes fees. There are other disadvantages to low limit credit cards along with fees, but there are benefits to having a low limit credit card as well.
Types of Low Limit Credit Cards
There are many different kinds of credit cards that might have a low limit. Other credit cards have a low limit because your credit history is not high enough to warrant a higher limit; your low score tell credit card lenders that you have poor financial habits and are thus a risk for nonpayment. Credit cards that commonly have a low limit are:
- Credit cards for people with bad credit. Some credit card companies offer credit cards that specifically target those consumers who have a poor credit score. Those with late payments, missed payments and those with little credit won’t qualify for a credit card with a higher limit; they have a poor history of repayment. The low limit keeps those with bad credit from racking up high charges that they might not repay.
- Store credit cards. Traditionally, store credit cards will have a lower credit limit than other credit cards. Because the card can only be used at a limited number of locations, consumers can only charge so much on the card. The limit does not need to be high.
- Gas credit cards. Again, just like store credit cards, gas credit cards can generally only be used for a limited number of purchases; there is only so much gas that a consumer can charge to the card.
Benefits of Low Limit Credit Cards
Low limit credit cards can have a great amount of benefits when used responsibly. Firstly, you have the benefit of credit, even if it is a small amount of credit. Credit allows you to pay for purchases over a longer period of time. This can safeguard your cash-on-hand and break up a large purchase into smaller, more manageable payments.
Next, any type of credit helps to build your credit score. This is true of low limit credit cards too, according to Experian, one of the credit reporting bureaus that calculates your credit score. Low limit credit cards are a good option for those just starting out with credit.
Credit cards with low limits can also help to improve bad credit.
Those who have gotten into financial trouble with higher-limit credit cards or other forms of credit may only qualify for credit cards with low limits. It is an opportunity to repair that poor credit score through on-time payments and low balances.
Disadvantages of Low Limit Credit Cards
Every credit card has its disadvantages, and this is true for low limit credit cards as well. If not used responsibly, any credit card will have a negative effect on your credit score; this can affect getting other forms of credit, such as a loan, your car insurance rates, and even your chances of getting certain jobs. Late or missed payments will be reported to the credit bureaus, and such negative information lowers your credit score.
Additionally, low limit credit cards also make it easier to reach your credit limit because it is such a lower amount. MyFico.com, the group that creates the formulas for calculating credit scores, maintains that the amount you owe on your credit cards affects 30% of your credit score. It is called your credit utilization ratio, and it is the percentage of your available credit that you have used. For example, if you have a balance of $250 on a credit card with a $500 limit, your credit utilization ratio is 50%. A high credit utilization ratio will negatively affect your credit score. A high utilization ratio will be reached faster with a low limit credit card.
Moreover, credit cards that are specifically for those with poor credit will generally have a higher interest rate than traditional credit cards. The high rate of interest is to offset the risk of nonpayment. However, it also adds up to more debt when the card is not used responsibly and the charges are not repaid. This can lead to even more debt through penalty interest rates, late payment fees, and over-the-limit fees.
Using Low Limit Credit Cards Responsibly
Every credit card must be used sensibly if it is to have a positive impact on your finances and your credit score.
Saving the credit card for emergencies and paying off the balance every month is the best way to use the card in a constructive way.
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