All the Risks You Run Going Over Your Credit Card Limit
Going over your credit card limit is possible, but it will likely cost more than the convenience is worth. Although over-limit protection – a card feature that allows you to spend over your credit limit – might save you the embarrassment of a declined card, it could mean paying fees and even higher interest rates.
Before you sign up for over-limit protection, here’s what you need to know about going over your credit card limit.
Can You Go Over Your Credit Limit?
When you opened your credit card, you received a credit limit based on your credit history, income and other factors. Your credit limit is the maximum amount of credit a financial institution extends to you.
Even when you mistakenly go over your credit limit, you can use your card if you are enrolled in over-limit protection, although you probably won’t know exactly how much over the limit you can go.
“Over-limit protection allows cardholders to exceed their credit limit in a time of need,” says Rachana Bhatt, executive vice president of unsecured lending at PNC Bank. The feature requires the card member’s consent and typically comes with fees for the completion of a transaction that exceeds a credit limit.
“As with everything, there are advantages and limitations,” says Bhatt. For example, it can be advantageous when faced with a critical transaction, like a utility or cellphone bill. However, it won’t be worth it if the purchase in question is something small like a convenience store splurge.
It’s also important to keep in mind that some cards have different limits for different types of transactions, such as regular purchases versus cash advances,
Charge Card Vs. credit card
Whether or not you need to worry about a credit limit depends on if you have a charge card or a credit card. “A charge card typically doesn’t come with a spending limit and often requires the total balance to be paid in full each month,” says Bhatt.
Should You Go Over Your Credit Limit?
However it happens, going over your credit limit is not a great idea, says Tom Quinn, vice president of scores at FICO. But creditors allow it “for the consumer who needs that buffer and might not have any alternatives, such as a debit card with cash,” he says.
Before the Credit Card Accountability Responsibility and Disclosure Act of 2009, cardholders were automatically enrolled in over-limit programs and charged a fee every time they went over the limit. The CARD Act outlaws this predatory practice.
Unless you opt in to over-limit fees, a transaction will be declined when your card doesn’t have the available credit to cover it. Your fee cannot exceed the amount of the transaction – if you went over your credit limit by $10, the fee cannot be more than $10 – and you cannot be charged more than one over-limit fee per billing cycle.
The Effects of Going Over Your Credit Limit
Exceeding your credit limit has a number of consequences, ranging from embarrassing to expensive:
- Declined card. If you have already exceeded your credit limit or if a purchase will bring the credit card balance beyond that limit, the transaction could be declined, says Bhatt. If that happens, you will have to use an alternative form of payment. Some credit card companies will approve the transaction at no cost on a case-by-case basis, but the cardholder must immediately pay back the overage.
- Fees. Your card issuer can authorize transactions that exceed your limit if you opt in to over-limit protection, but fees apply. They usually range from $25 to $35.
- Increased interest rate. If you go over your limit too many times, your issuer may raise your interest rate. This can be even more financially devastating than the fees.
Overall, exceeding your credit limit is a sign of “potential overextension,” Quinn says. In other words, this habit shows that you are spending beyond your means and are not being responsible with your available credit.
How Going Over Your Credit Limit Affects Your Credit Score
Going over your credit limit can have not only short-term costs, but also long-term effects on your credit. These may include:
- A hit to your credit score. Your FICO score takes into account how much of your credit limit you’re using, according to Quinn. A high credit utilization ratio is a “very particular indicator of risk,” he says, meaning your score will continue to drop as you get closer to your limit. “And in some cases, when you go over your limit, FICO will take off even more points than if you’re just below your maximum,” Quinn says.
- A credit limit decrease. If you habitually go over your credit limit, your issuer could lower your credit limit.
- A canceled card. If you swipe past your credit limit too many times, you could lose access to your account. Credit card issuers have the discretion to close or freeze your account for a variety of reasons.
How To Avoid Going Over Your Credit Limit
Fortunately, there are some strategies you can follow to make sure you never hit your credit limit.
- Opt out of over-limit protection. Even better, never enroll in the first place. “Realistically, you shouldn’t be spending that close to your overall available credit line,” says Vanessa N. Martinez, a financial wellness coach and founder and CEO of Em-Powered Network. She recommends keeping tabs on your spending and aiming to use 30% or less of your credit limit.
- Set up credit card alerts. “Alerts empower consumers to take control of their finances,” says Bhatt. “These notifications help consumers take action and avoid exceeding their credit card limits.” Better yet, customize your alerts to let you know when you’re approaching a much lower threshold, such as 30% or 50% of your credit limit – that way you’re not letting it get out of control.
- Avoid waiting till the due date to pay. You can keep your credit card balance down by making payments throughout the billing cycle instead of waiting until the payment due date to send one lump sum. Ideally, you should pay off a purchase as soon as it appears on your account. Or you can get into the habit of paying the balance off in full each time you are paid, says Bhatt.
- Request a credit line increase. Contact your creditor, either by phone or online, and request an increase in your credit line. “The lender will evaluate whether they’re willing to give that to you or not from a risk perspective, so there’s no guarantee you’ll get it,” Quinn says. “But definitely make that request if you feel that you’re going to be in a situation where you’re charging close to above your limit.”
- Keep an eye on your credit score. your credit score indicates how well you’re managing your debts, and keeping an eye on it is a great way to ensure that you’re staying on track. If you have a credit card with a major issuer, there’s a good chance that you will have free access to your FICO scores and the factors affecting them, says Quinn. you can also get free weekly credit reports from the three major credit bureaus through December 2023.