Credit card stress trouble
First credit cards issued to you have a lower-than-usual credit limit as it takes repeated practice to learn how to use credit judiciously and avoid getting your bills from piling up. Image Credit: Shutterstock

Dubai: Whatever your reason for spending your first credit card, be it having access to credit for emergencies, earning shopping or travel rewards or having extra protections in place, or even building your credit history, you will likely be limited by the fact that the card has a lower credit limit.

But why do the first credit cards issued to you have a lower-than-usual credit limit? This is primarily because it takes a bit of extra time, effort, or repeated practice to learn how to use credit judiciously and avoid getting your bills from piling up. UAE-based credit advisors explain how this can be applied to those with a spending problem as well.

“Paying off your credit card dues in each billing cycle is a habit that you need to get used to in order to establish a pattern of using credit and paying it off,” said Essam Kabeelali, a UAE-based consumer credit advisor.

“If you, instead, max out your low credit limit every month, you run the risk of establishing a pattern of high ‘credit utilisation’, which is the widely recommended or advised amount of credit you are asked to use of the total amount of credit you have available to avoid debt burdens from piling up.”

Low-limit credit cards aid recovery from debt trap traumas

After years of struggling with an unsurmountable pile of debt, let’s say you're now finally debt-free, have extra cash to spend each month and your credit score is higher than ever. So what’s next for you? Do you now stay away from high-interest debts like credit cards altogether?

“You may not think you're ready to use credit cards and risk falling into a deep debt trap again, and doubt yourself whether to restart just to earn rewards for each dirham you spend,” added Kabeelali. “But it’s not worth stopping yourself completely. This is when a starter card with low limits can help.

“This is because a bitter experience with high-interest debt shouldn’t keep you away from using them altogether. You're debt-free and have a much better grasp on your spending now. Plus, paying off debt has helped you develop the discipline to avoid letting your spending get out of hand.

“While it's great to feel confident, you should probably still err on the side of caution to avoid any more credit mishaps, even when easing back with a low-limit credit card. It's true you may feel like you are ready for credit cards with larger limits, but there are still precautions you'll want to take.”

How else do you ease back into credit card use?
According to Rupesh Naish, another debt advisor in Dubai, there are three rules to follow as you ease back into credit card use, especially when starting out with a lower-than-usual limit credit card:

Rule #1: Review spending frequently, make frequent payments — especially at first.
Rule #2: Use credit cards for fixed bills only, as part of a monthly spending plan.
Rule #3: Hold off on using credit cards for rewards if you're not certain.

Frequently review your spending when you restart use of cards

One of the first steps to take when restarting your credit card spending is to review your spending frequently. "I suggest reviewing every few days or at least weekly at a minimum, at least at first, although you can tailor this advice to your lifestyle and needs,” Naish added. But why does it help?

“By reviewing your spending at least once a week, you intentionally check if using a credit card has brought on any of your old spending habits. This way you can ensure you're not using credit as an excuse to splurge, and all you've purchased can be paid off quickly when your bill becomes due.”

Naish also suggested making more than one payment each month. “If you have access to your account online, you can usually make pre-set payments from your savings account instantly. This allows you to keep your balance from accumulating and lets you maintain a low ‘credit utilisation’.”

“By making frequent payments, you can stay on top of your spending, take advantage of credit card rewards, and avoid deeper credit card debts. A lower limit credit will then serve as nothing but a self-imposed curb or limitation to overspend till you start to shop with discipline,” added Naish.

Multiple credit cards
Using credit cards as part of a monthly spending plan can help you make the most of rewards without falling back into debt.

Low-limit credit cards can still play an active role in monthly spending

Kabeelali also suggested using credit cards as part of a monthly spending plan if you want to make the most of rewards without falling back into debt. “Try writing out a budget for the month, then make sure you never charge more on that card than you would if you were paying in cash,” he said.

“Ensure it’s never an amount that can't be paid off each month. If you don't track it, credit card dues can get big very quickly. I still compare my spending to my budget at least once a week to earn travel rewards points good for airfare or hotels while making sure the spending isn't getting out of hand.”

Naish offers a payment strategy for people who want to ease into credit use slowly when it comes to paying their routine or everyday bills: “Try paying only recurring bills with your low-limit credit cards and use cash or debit for everything else. Recurring bills include any bills you pay monthly.

“Very often, you can even set these bills up to be charged to your card automatically. From there, you can set up automatic payments so your credit card bills are paid once a month from your savings account. This also helps to maximise rewards while avoiding debt problems.

"For example, let’s say a certain recurring bill is Dh1,000 per month and it is automatically charged to your low-limit credit card where you earn points used to take a family vacation. But you also set up a monthly bill pay to automatically send Dh1,000 per month to pay off the card."

Final thoughts?

For any debt strategy to work, even one involving a low-limit credit card, avoid overuse of your card. “Low-limit credit cards help keep spending in check as your spending cannot go beyond a point, but bear in mind you are still using money you don’t earn. It’s still credit or debt,” said Kabeelali.

“For many, the risk of getting back into debt is simply too great. If the use of credit card with any limit sounds overwhelming, don't jump in just yet. Give it time! So while low-limit credit cards can definitely help you, it’s still your responsibility to pay it back, even when you can’t.”

This risk is there with all types of credit cards. Let’s say you restart the use of credit cards to earn 2 per cent cashback on your – albeit limited – purchases, what happens if you wind up paying 24 per cent interest on those purchases for years?

“So while sign-up bonuses can make the initial rewards sweeter, especially when you are recovering from a crippling spending problem or any debt trap traumas, it's still a terrible deal when you're stuck paying credit card interest for long,” said Naish.

“Pursue credit card rewards if you're determined to do it sensibly, but don't forget there's nothing wrong with skipping credit altogether,” agreed Naish, echoing Kabeelali’s final thoughts. “While the rewards may be tempting, the risks can still turn scary – low-limit credit card or not,” he added.