How to Use a Credit Card With a Low Limit to Build Credit

When you’re trying to build or rebuild your credit, starting small with a low-limit credit card may not seem like it will get you very far. 

Take a secured credit card, for example. It is one of the most frequently recommended tools for rebuilding credit. But since your credit limit is tied to your deposit, you won’t have a large credit limit unless you can afford to put aside a chunk of your cash as a security deposit. 

Don’t let that deter you. Starting small can be more powerful than you think. 

With no large credit limit to make it easy to run up large balances, you take less risk. Fraud is less likely to create a big problem, as any attempt by a crook to use your card for a spending spree will be limited to the credit limit. 

And most importantly, these cards can help you start building credit, provided you use them strategically. 

A low-limit credit card can help build credit if you keep your balance low, make every payment on time, and use the card regularly. Even cards with limits of $200 to $500 can improve your credit score when used responsibly.

I remember meeting with someone with a very high income who was trying to rebuild his credit after a messy divorce. His secured card, which had a $300 limit, appeared as maxed out on his credit reports. And that meant this card was hurting his scores even though he paid on time. 

Generally, it’s a good idea to aim for low balances on your credit cards to help build good credit scores. Keeping your balance below 30% of the limit is often a recommended benchmark, though even less than that can be beneficial for some people. 

The reason this strategy is mentioned so often is that debt is one of the most important credit score factors. 

And when it comes to debt, most credit scores take into account your credit utilization. This factor compares the balance that appears on your credit report to the reported credit limit. Keeping your balance below 30% of your credit limit is often recommended when building credit.

Let’s say your issuer reports a balance of $100 on a card with a $300 limit. Your utilization will be calculated as 33%. 

Here’s the formula: Divide the balance by your credit limit and then multiply by 100 to get that percentage.

With a low limit, it’s easy for a few purchases to trigger high utilization. To avoid that, you may want to use your credit card for just a few smaller purchases or pay off part of your balance throughout the month. 

But don’t avoid using your card altogether, or pay off every purchase the day you make it, or your card may be categorized as inactive.

You can pay your balance off in full to avoid interest, but pay attention to when your issuer reports to the credit bureaus, as the reported balance will be used to calculate your credit scores. 

Again, what’s important here is the balance reported to the credit bureaus, which may not be the same as the amount you owe after you’ve made your monthly payment. Compare your recent statements to your credit reports to get an idea of when your issuer reports to the credit bureaus. 

Late payments often sink credit scores. I have yet to see a credit scoring model where payment history is not the single most important factor. 

Paying on time going forward is critically important to building or rebuilding your credit scores. 

In most cases, recent payments carry more weight than older ones. That means that paying late now can hurt your credit scores more than a late payment that appears on your credit reports from a few years ago. 

There are a few other nuances to this factor that may be helpful to understand as you work on your credit. 

First, if funds are tight, you can just make your minimum payment to keep your payment history showing on-time payments. 

The minimum payment is the smallest amount you can pay without triggering a late fee or other consequences, such as being reported late to credit bureaus. 

The minimum payment is often calculated as a percentage of the balance due. On a low-limit card, the minimum due will often be $10 or $15, though sometimes cards will require a minimum payment of $25 or more. 

I realize that for many people even that can seem like a stretch, but if you can find the funds, making at least the minimum payment on time can prevent a late payment that can appear on your credit reports for up to seven years. 

With consumer credit cards, you may be able to pay nearly a month after the due date without being reported as late, since payment history is usually reported in 30-day buckets. (Always check with your card issuer first, as it’s possible for your account to be reported late sooner than that.)

Still, a late payment can be expensive. If you miss the due date, you will usually be charged a hefty late fee that can make it harder to make next month’s payment on time, and that can lead to a spiral of missed payments. 

I also suggest you consider setting up automatic payments, if possible. Your credit card issuer should make it easy for you to set up autopay for the minimum payment or another amount you choose. 

The only time I don’t recommend this is when your linked bank account balance won’t have enough money to cover your minimum payment. 

When that happens, you may overdraft your bank account and incur an overdraft fee. If auto pay isn’t a good option for you, set up alerts instead. Many issuers will let you opt in to text messages and/or emails reminding you that your payment is due.

Your goal with a low-limit credit card should be to help you build better credit so you can move on to other credit cards or types of credit, often with higher limits. 

With secured cards, a few of them will increase your credit limit beyond your security deposit if your payment history and recent credit history are good. 

As your credit scores improve, you’ll likely want to get another credit card to help build more credit. An unsecured card (one that doesn’t require a security deposit) can be a good next step. 

Handle the new card the same way: keep balances low and pay on time to help build credit. 

Still not sure whether a credit card with a small credit limit is right for you? Here are answers to common questions about how to use them to build credit. 

Will a Low-Limit Credit Card Hurt My Score?

While FICO doesn’t address this question directly, it notes that “When we study credit reports, we find that once a lender has reduced an account’s credit limit or closed the account, the borrower’s FICO score may go down, it may go up, or it may stay the same.”

That may seem like one of those unsatisfying “it depends” answers, but it’s very likely that the biggest impact of one of these cards isn’t necessarily the credit limit, but rather how you use it. 

Utilization and payment history are two of the most important factors when it comes to building credit. 

What’s the Difference Between Secured and Unsecured Credit Cards?

The difference between a secured and an unsecured card is the security deposit. With a secured card, you must place a security deposit with the issuer. 

Often, your credit limit is the same as the amount you deposit, at least initially. 

That money stays on deposit with the issuer, usually until you close the account. You’ll get it back as long as you don’t leave an unpaid balance. 

An unsecured card doesn’t require a deposit, which makes it more appealing if you don’t have a lot of extra cash available, or if you want to keep those funds available for other spending priorities. 

Can I Get Approved If I Have No Credit History or Bad Credit?

Credit cards with low limits, including secured cards, are often marketed specifically to people with low or no credit scores. The lower limit helps reduce risk, but it doesn’t remove it. 

Issuers will still likely check your credit as part of the application process. Some issuers will use a soft inquiry that doesn’t impact your scores to pre-approve your application. 

But when you officially apply, there will usually be a hard credit check that impacts your credit scores with an inquiry. Fortunately, inquiries usually drop your credit scores by only a few points, and the effect is often short-lived.