Your credit card limit exists for a reason. If you go over your limit, you could risk having to pay expensive interest charges and see your credit score drop a few points. Plus, you will be paying off your balance for longer than you anticipated. If you're worried about running into this situation or only want a credit card to use sparingly, consider looking at a secured credit card as an option.
This type of card can be useful for building your score and learning money-management habits, as you're only allowed to use what you put on the card as a deposit. For instance, if you put down $700 to get the card, you will then have a line of credit for $700. But be sure to pay off your balance each month, because if you don't, the lender can keep your whole deposit, similarly to if you don't pay rent to your landlord. This could help you curb overspending, but you should be aware of all the ins and outs before you sign up for a secured credit card. Research this option carefully, because you don't want to get in over your head with a whole new line of debt to your name. Here is a quick primer on secured cards:
- Establish good credit: You can only build credit if you use your card. While you may be nervous to run up your balance, secured cards are helpful because you don't have to worry about your credit-utilization ratio getting out of hand. And if you pay off your card on time, it will be reflected positively on your credit report.
- Available to most users: Repairing your credit score after being sent to collections or filing for bankruptcy can be tough. Standard credit cards may not be available to you in these situations, but secured cards can be an option.
- Practice responsible habits: Whether you applied for a secured card because it's your first credit card, or you're trying to repair your score, this card can help you develop good spending habits. Using a secured card only when you can afford to teaches you how to curb overspending.
- Upgrade to standard card: If you have shown that you're a reliable borrower and have remained on top of your payments, the lender could change this card to a standard one.
- Spending limits: You have decided to go with a secured card because you're trying to fix your spending habits, so you should know that this option does not have high limits.
- Extra fees and interest: Because these cards may not be as widely used as a standard ones, you will be charged more expensive fees and have higher interest. Some lenders may even tack on a monthly charge to keep the account open.
- Lenders can keep the deposit: You should be improving your spending habits, but if you are still forgetting to pay your balance, the lender could shut down your account and keep the deposit.