Does a Low Credit Card Limit Hurt Your Score?

You might think that not having a lot of available credit would improve your credit rating, because you cannot get into heavy debt, but this intuitive thinking is wrong. While a low credit card limit does not automatically damage your credit rating, a minimal balance on a low-limit account can cause dozens of points of damage. Also, a low limit may not give you enough experience handling credit.

Identification

A low credit card limit --- usually less than a few thousand dollars --- does not harm your credit rating, because the FICO scoring model does not factor in total amount of available credit into it your score. However, the FICO model give credit utilization, or portion of credit limit available, a significant weight in your rating. For example, a balance of $500 on a card with a $1,000 limit has a utilization rate of 50 percent --- the same as a card with a balance of $5,000 and a limit of $10,000. Maxing out any credit card costs up to and maybe more than 45 points, according to Ellen Cannon of Bankrate. The impact of a high utilization rate diminishes as a credit rating decreases.

Thin Credit History

If a low-limit credit card is your only account, you may not have enough credit history on your credit report to obtain a large loan like a mortgage, even when you keep a low balance and always pay the bill on time. Banks want to see an applicant that successfully manages multiple lines of credit with a significant balance.

Benefits

Limiting the amount of money you can spend on credit may help your overall financial situation and credit rating. If you frequently overspend or make impulse buys, you may rack up thousands of dollars in debt --- total amount of debt counts for 30 percent of a FICO rating. A high balance may also mean you spend more than you can afford, which may lead to missed payments and possibly a collection account or civil judgment if the creditor thinks you cannot pay the debt at all.

Tip

Request a limit increase from your lender, but ask about its policy on credit checks. If the creditor runs a hard check on your credit, the inquiry takes up to five points off your FICO rating. Many credit card companies offer automatic limit increases every six months or so. You can lower the utilization ratio on a low limit card with a limit increase by spreading the balance over other credit card account you may own.