Credit cards with low limits are a good way of rebuilding your credit profile if you've had problems with debt in the past. They can also help people who haven't borrowed money before establish a payment history. Lending to sub-prime borrowers fell considerably after the financial crisis, but banks are becoming increasingly willing to take risks again. Sub-prime credit card lending rose by 41 percent in 2011 to a four-year high, according Equifax. So, if your FICO score isn't what it could be, a low-limit credit card could be just the thing for you.
The amount of interest you'll have to pay on any balance carried forward on a sub-prime credit card will be high. Some credit cards with low limits charge APRs of up to 29 percent. You can expect to pay close to this if you have a poor FICO score below 620. If you have a fair score between 620 and 659, you may be able to successfully apply for a card charging 20 percent, according to the card comparison site CardHub. Consumers with an excellent score between 720 and 850 enjoy rates as low as 13 percent.
Pay Balance In Full
Spend a small amount on your sub-prime card each month and clear your balance in full before your due date. This will allow you to build a good payment history without paying interest. You'll soon start to get into trouble if you're carrying a balance every month and racking up finance charges.
Secured Credit Cards
Taking out a secured credit card with a low limit will be a good option if you're turned down for an unsecured card. You'll need to put down a deposit of at least a couple hundred dollars as collateral. Make sure the issuer of any secured card you plan to take out will report your account management to the three major credit bureaus if you want to build your credit score. Secured cards can also be a good way for young people with no credit history to build a profile.
Shop around for your low-limit credit card. Although you won't need to worry too much about the interest your card issuer charges if you're going to be clearing your balance in full each month, look out for any annual fees. It will be worth going for a card that charges a higher rate of interest but carries no annual fee if you're confident you'll be able to pay off what you owe each month.
It's rare, but you may be able to find a sub-prime credit card that offers benefits such as cash back on purchases. This means you'll actually be paid to buy goods and services. If you clear your balance every month, you'll actually be making a small profit. Avoid cards that offer interest-free introductory offers. These will only encourage you to build up a balance.
Michael Roennevig has been a journalist since 2003. He has written on politics, the arts, travel and society for publications such as "The Big Issue" and "Which?" Roennevig holds a Bachelor of Arts in journalism from the Surrey Institute and a postgraduate diploma from the National Council for the Training of Journalists at City College, Brighton.