How to manage a low-credit-limit card to boost credit score

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
If I have a $300 credit limit, what will be my monthly bill and how do I best manage my credit while still improving it? – Javon

Answer

Dear Javon,
How much your bill will be will depend on what you charged that month.

You could choose to pay less than what you charged with the card, but that’s not optimal for building a good credit score. The standard minimum expected payment is 1 percent of the principal amount due, plus all fees and interest.

If you charged $200 on the card, for example, but cannot afford to repay the entire balance, you will be expected to pay the minimum payment until the balance is paid off. The longer you take to get your balance back down to $0, the more you will end up paying interest charges.  

So let’s talk about the best way to manage your card and build your credit rating.

Your account should be appearing on the three major consumer credit reports: TransUnion, Equifax and Experian. The issuer would have provided them with the date the card was granted and the credit line. When you start to charge and repay, it will furnish the agencies with your payment activity.

Credit scoring companies such as FICO and VantageScore then enter the picture. They take the data from the credit reports and turn it into scores between 300 and 850. Higher numbers are preferable, as they indicate less lending risk. Some credit report information is weighted more heavily, such as your payment history and the amount you owe. The length of time you’ve had and used multiple forms of credit, and the number of credit applications (fewer is better) are also factors in calculating your credit score, but these factors are not quite as vital.

Here’s how to create a high credit score, in three deceptively easy steps:

  1. Keep the total of your monthly charges low.
    With a low-limit card, maintaining a healthy credit utilization ratio becomes paramount. You want the lowest possible balance at all times, and keeping charging to a minimum will do that. If you always keep as much of your credit line open as possible, you can ensure that a high balance won’t hurt your scores.

  2. Send payments on time.
    You’ll receive monthly statements outlining your charging actions, as well as a payment due date. Pay by that date and the issuer will send that information to the credit reporting agencies. The more on-time payments you have listed on your reports, the higher your scores will be. You’ll also avoid late fees, which are capped at $27 for the first offense.

  3. Pay the entire balance.
    Another way to answer your monthly bill question is this: It’s what you charged that month. If it was $20, that’s your bill. If it was $240? Then that’s your bill. Yes, credit cards give you the option of paying for something over time, but get into the habit of only charging what you can afford to pay that month. Plus, you won’t be charged interest if you pay the entire balance due on time. It’s tempting to charge more than you can repay in 30 days. That’s why this process isn’t always so simple. It requires a lot of self-control.

If you keep this up for a year, you’ll have a substantial amount of positive payment activity listed on your credit reports. This will act as proof that you’re a responsible credit card manager. Your scores will probably be good enough to qualify you for a credit card with an even higher limit. Consider adding one, but only if you’re totally committed to using it the same way as the card you have now. With multiple credit accounts in the mix your credit scores will quickly rise, but only if you handle each the right way!

See related: FICO’s 5 factors: The components of a credit score, 16 things that don’t hurt your credit score, 18 things that will hurt your credit score

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Updated: 11-22-2017