The Dangers of Low Credit Limits

Just like the notion that no credit equals good credit, having reduced limits may well be really bad for your credit score. To recognise exactly how this functions you need to understand utilization rates, or what we call the 30% rule. Credit bureaus expect to see that you're sustaining under 30% of your respective credit limit all the time. If you go beyond the 30% marker, you're considered to be living beyond your means and this will likely be shown on your credit score.



The drawback with lower limit credit cards is that often it is much too easy to go beyond the 30% rule. If you have only a $250 credit limit, you can't ever have a balance of more than $75 without having a negative reaction to your credit rating. On top of that, many credit card companies report your credit limit lower incorrectly. This means you may be right under $75 every month, but your credit limit is recorded at $200 instead, placing you above the 30% limit.



In some cases, when you’re restoring your credit you may have to use these lower balances. This will take careful planning to avoid any difficulties with errors. However, when you have higher account balances, you don't want to request for your rates to be reduced. You'll never have "too much available credit."



The easiest way to ensure you don’t go over the 30% rule is to use automatic payments. You’ll want to plan a regular monthly payment for any bill, like a gym membership or another monthly payment you need to make to be taken from your credit card. Then, through your checking account, schedule one more auto payment to pay the credit card for the same amount.This might seem like having a couple of extra steps, even so it helps to keep your accounts active and you will control precisely what spending is occurring on your cards to ensure you won't go beyond the 30% limit.



Learn more about how to fix bad credit and create a high credit score at Phil's site dedicated to giving the facts about credit scoring and personal finance.