Will a low-limit credit card help build credit?

A low-limit credit card is a card that limits the amount you can borrow at any one time. Find out whether a low-limit credit card can help you build credit.

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If you are wondering whether a low-limit credit card can help you build credit, the answer is yes. However, there are a few pitfalls that you need to watch out for. Let’s take a look at what you need to know about using a low-limit card to build credit.

What exactly is a low-limit credit card?

A credit card limit sets the maximum amount you can borrow on a credit card at any one time. A low-limit credit card is therefore a card that only allows you to borrow a small amount on the card.

The actual amount will be determined by the card provider and will depend on your individual financial circumstances. Low-limit credit cards typically have limits ranging from £200 to £1,500.

If you borrow more and go over your credit limit, you are likely to face a charge for doing so. You may not be able to spend again until you pay off part of your balance.

What’s more, going over your credit limit could also cause you to have your credit limit reduced. Your lender could also raise the APR on your card.

Can a low-limit credit card help me build credit?

In a word, yes.

A low-limit credit card is designed to keep you from spending beyond your means. This, in itself, is a good thing, particularly if you have a knack for overspending.

When you are not overspending, it is much easier to pay off your credit card balance in full every month. Even if you can’t pay in full, you can at least make the minimum required repayments on time. You can use this to demonstrate to lenders that you are a responsible borrower. This can help you build a good credit score.

That said, a low-limit credit card can dampen your credit history and draw down your credit score. It all depends on how much you spend on your card each month.

Even if you pay off your entire balance each month, if you spend a lot, you’ll have a high ‘credit utilisation ratio’. This is the amount of credit you use every month compared to the amount of credit that’s available to you.

To get a good credit score, it’s recommended that you keep your credit utilisation ratio under 30%. For example, if your limit is £1,000, try not to use more than £300 at a time. Needless to say, keeping your debt under 30% of your limit is more difficult when your limit is already low.

So, a low-limit credit card can indeed help you build credit – if you use it correctly. Be sure to make your payments on time and keep your credit utilisation ratio below 30%.

How can I get a low-limit credit card?

You can get one by applying for a credit card that typically comes with a low credit limit.

An example is a credit builder card. This is a card designed to help people with a bad credit score, or little-to-no credit history. To find the right card for your needs, check out our comparison of top-rated credit cards for bad credit in the UK.

If you are not building your credit from scratch, you might not have to apply for a new card. Instead, you can simply contact your current card provider and ask them to reduce your current credit limit.

Keep in mind, however, that lowering your credit limit before paying off your balance may lower your score because it will raise your credit utilisation ratio.

Are there other ways to build credit?

A credit card is not the only way to build credit. Here’s what else you can do to improve your credit score:

  • Get on the electoral register.
  • Open and manage a bank account.
  • Manage a small credit account such as a store card or a mobile phone contract.
  • Pay your household bills on time.