If you’re a regular credit card user, you know you have a credit limit. This is the amount of credit the issuing bank allows you to access. Although this number is the maximum you can use, it is possible to exceed that limit. However, doing so can cause dire circumstances. Here’s what happens if you go over your credit limit and why you may want to avoid it.
Can you go over your credit card limit?
It is possible to exceed your credit limit. Unfortunately, no set industry standard dictates whether or not you can go over your limit. Issuing banks establish whether or not users can go over their credit. They often take your history with the bank and payment history into consideration when making a judgment call.
Credit card companies allow for such activity via over-limit protection. However, you must typically opt-in to activate this feature on your card. This may result in users needing to approve a purchase, often within an app, to allow a purchase to go through. And, it comes at a cost. Expect to pay a fee when you exceed your limit.
Not every credit card allows users to spend over their limit. In this case, your purchase is denied at the point of sale. Thankfully, no fees occur if this happens.
How does exceeding your limit impact your credit score?
Spending over your credit limit can have a significant negative impact on your credit score. This is because overspending increases your amounts owed, which accounts for 30% of your overall credit score.
As you increase your credit utilization ratio, your credit score could decline. Worse yet, this can impact your receiving a competitive interest rate or loan in the future as banks may view you as a riskier individual. To avoid this, it’s best to repay as much of your outstanding debt as possible and use less of your available revolving credit.
➤ SEE MORE:How much of your credit limit should you use?
What happens when you go over your credit limit?
If you’re struggling with credit card debt, you may be wondering, ‘what happens if I go over my credit limit?’ Unfortunately, this is a growing challenge for Americans as more struggle to make minimum payments with 14.2% facing this concern, according to the Federal Reserve Bank of New York.
If that’s you and you fear exceeding your credit limit, or merely going over, here are some possible repercussions:
You may incur a penalty APR: Some credit card companies will apply a penalty APR to your account. The new APR will apply to your total balance; expect it to last at least six months.
You can lose rewards: Depending on the terms and conditions of your credit card, the issuing bank may claw back or suspend your rewards. Any points or cashback you’ve accumulated could, at the very least, be held in limbo until you get your spending back under your credit limit.
Decreased credit score: Going over your credit increases your credit utilization ratio. The ratio number is the second largest component of your credit score. This one action can cost you significant money in the long run, thanks to higher interest rates.
You may pay fees: Credit card companies can charge you a fee when you exceed your credit limit. Thanks to the CARD Act of 2009, the fee is up to $35, but it can’t surpass the amount of the purchase that took you over your limit, and it can only occur once during a billing cycle. For example, if the overage is $15 it can’t top that. Thanks to federal law, you must opt-in to even pay such fees. If you don’t, all transactions that surpass your limit will be declined.
You may face account closure: Credit card companies are commonly risk averse and don’t like it when users exceed credit limits. If it happens once, you’re likely fine, but if it’s a regular occurrence or you do it multiple times over a short period, the bank may close your account.
How much can you go over your credit limit?
There is no industry standard for how much you can exceed your credit limit. It’s best to consult the terms and conditions with your credit card to determine how much you can go over your credit limit.
If you’re trying to determine whether or not you should make a purchase that will exceed your limit, it may be best to determine if the purchase is worth the associated fees and risks. Look for other means to pay for the item or service, or forego it until you have the resources, if possible.
How to avoid exceeding your credit card limit
Prior planning is the best course of action to sidestep going over your credit limit. These are some powerful steps you can take to avoid exceeding your limit:
Create alerts: Many credit card companies let you establish alerts to be notified of account activity, including approaching your limit. Using these can be a helpful reminder if you don’t track your spending.
Don’t allow overdrafts: Sometimes, the simplest action is the most powerful. If you’re enrolled in allowing overdrafts, opt-out online or call the bank to request out.
Consider a balance transfer: If you’re near maxing out a credit card and are committed to repaying it, a balance transfer credit card may help. This will take your interest rate to zero for a limited time, allowing you to reduce your overall indebtedness and save money on interest.
Request a credit limit increase: Banks are open to rewarding good customers. If you have a good history with the bank and have a steady income, ask to increase your credit limit. Just make sure not to use it as an excuse to overspend.
Don’t wait until the due date to make a payment: One-off situations may occur where you have an expense you can’t avoid. What happens if you go over your credit limit, but pay it off immediately? You will likely incur a fee, but you don’t need to wait until the due date to repay your card. If able, pay, then call the bank to explain the situation. Just make sure not to use the amount again within the same statement period, as banks don’t typically like such activity.
The bottom line
Credit cards are excellent tools to help with money management and building credit. But, if you don’t use them responsibly, they can cause heartache. Rather than actively using all of your available credit, seek to minimize usage to amounts you can repay. Doing so can help you establish a good credit history, save money on interest, and earn rewards.
