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.
Dear Opening Credits,
I recently applied for a couple of credit cards and was rejected for all of them immediately. I have no credit history, but I am currently working at a job that is paying me six figures and living at home with my parents, so I have no rent expenses. I applied for a Discover it card today based on a friend’s referral and got accepted with a $500 line of credit. Is that normal for someone with no credit history? I’m assuming it is, but saw some articles online on how having a $500 limit can be bad for your credit score (I have no credit score at the moment, so I’m assuming that this doesn’t apply to me). Regardless, I just want to get the opinion of someone who is more familiar on this topic. Thanks! – Arjan
With the amount of misinformation on the internet, it can be difficult to know what’s correct. Myths and inaccuracies about credit topics abound, and there’s always some new dragon for the good guys to slay. Today, it’s the idea that a modest charging limit will negatively affect a credit score. Time to drive a sword into that nonsense!
The most common credit scores are FICO and VantageScore, and their scores range from 300 to 850. Higher numbers are predictive of lower lending risk. To develop a score, the scoring company takes the financial data listed on a consumer credit report (TransUnion, Equifax and Experian) and enters it into mathematical models.
In general, if you’ve had a variety of loans and credit cards for years and always paid on time, kept revolving balances low and satisfied your obligations, your scores will be excellent. Conversely, if you’ve had little experience with credit products, paid late, had accounts go into collections, were sued for debts and owe a lot (compared to your credit lines), your scores will be poor.
What happens if you have not yet done business with a lender? You have nothing on a credit report for the calculation of a credit score. You’re a mystery, and that’s an unattractive quality for credit issuers.
That also means that you’re likely to get rejected for credit products.
In the future, when you do have a solid credit history, know that repeatedly applying for new credit cards will hurt your credit scores. Each time you apply for a credit card, the issuer accesses your credit history, and a hard inquiry will be placed on your credit reports. A flurry of applications in a short period of time will raise a red flag, as it’s a sign of financial desperation. So apply for credit cards sparingly and with caution.
Although you pursued some credit cards for which you were not approved, eventually you landed on a card that’s a good match. Give your friend a high five because your friend steered you in the right direction.
Based on your income and expenses, you probably can handle a larger credit line, but that’s up to you to prove. At this stage, the credit card is appearing on your credit report with the date it was granted and your credit limit. Now follow these instructions:
- Don’t get close to your credit limit.
With a credit limit of only $500, it can be easy to sneak up on your limit. You do not want to do that. Keeping your charging low will keep your credit utilization ratio in a healthy place. If you must charge a large item that puts you close to the limit, pay it immediately. (It is OK to pay your credit card bill more than once a month.)
- Honor the due date.
About 30 days after you begin using the card, the issuer will send you a statement with the account activity and the payment due date. Always pay on time.
- Never carry over a balance.
You’ll also see a minimum payment listed on the statement. Ignore it and send the entire amount you charged instead. One day you may want to buy something expensive with a card and then pay it off in a few monthly installments, but this is not the time.
Every month the credit scoring companies will delve into your credit reports and input your activity with that card. By following the three steps above, your scores will steadily rise, and in a year they should be fairly respectable.
Discover will probably increase your credit limit, either independently or upon your request, after a year of steady payments, but you can also try to get another credit card to boost your charging power. In fact, having multiple accounts that you manage responsibly will make your scores rise dramatically.
And that’s the truth about credit cards with low limits. Spread it around!
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