What Happens When You Spend Over Your Credit Limit
Depending on the credit card provider, some banks give you the option to exceed your credit limit to avoid embarrassment and inconvenience at the cash register, but youll be charged an over-limit fee if you do.
Find out the different instances that might cause you to spend beyond your credit limit, which lenders will let you do so, and what theyll charge.
Determine Why You Maxed Out Your Card
Here are some common scenarios that may contribute to maxing-out a credit card that you may wish to consider.
- A one-time financial fluke.;Were you traveling with only one credit card, making several large purchases to pay for a home remodel, or have you just paid a large medical bill? A medical crisis can push even the most dedicated saver to their financial limits. A home remodel could be a desire, rather than a need or it could be a massive plumbing bill after a burst pipe. Dont panic when a crisis or large unexpected bill hits. The important thing now is to consider how you can start paying that down.
- Living beyond your means.;This one may be harder to stop, since its more likely to have become a longer-term habit. Perhaps you dont have the cash to fund your basic monthly expenses. Or maybe you keep spending beyond your budget on items or experiences, be they splurges or feel like must-haves. The goal now is to reassess.
- A low credit line.;If youre just building credit and/or have a secured credit card,;your credit limit;may be only a few hundred dollars. In this case, a balance equal to your credit limit may not necessarily be a sign that youre overspending, but it does present an opportunity to learn the ins and outs of credit and work on improving your financial habits.
What Determines Credit Limit
Credit limits are set by lenders. And there are a variety of things that could factor into the decision. Companies might look at things like your credit score, your and your credit application. Here are some potential questions lenders may consider:
- Payment history: Do you pay your bills, including monthly credit card bills, on time? Have you ever filed for bankruptcy or had a debt sent to collections?
- Current accounts: How many accounts do you have open? And what kinds of loans do you have open?
- Account history: How long have you had your current accounts? Have you applied for a bunch of new credit recently?
- Debt: How much do you owe? How much credit are you using? How much do you have available?
- Income: Do you make enough money to cover your monthly bill?
If you are unhappy with your credit limit, you could ask for a . And in some cases, your lender could decide on its own to adjust your credit limit. That could mean an increase or a decrease, depending on the circumstances.
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What If A Recurring Or Interest Charge Puts You Over Your Limit
In certain circumstances, a card issuer might have to OK a transaction that pushes you over your credit limit, even if you havent expressly opted in.
For instance, you make a $20 purchase and before this is charged to your account a different recurring charge is posted. When the $20 is subsequently charged, it makes you go over your credit limit. In these situations, the issuer cannot charge you a penalty for crossing your credit limit.
Another case in point is if interest charges for a billing cycle push you over the credit limit. The issuer cannot charge you a penalty for that, either.
Additionally, its left to the discretion of a card issuer whether to approve an over-the-limit transaction, even if you have opted into the arrangement. An issuer could also refuse to continue to honor your opt-in request in case it sees you as a credit risk at some point.
The law doesnt allow an authorized user on a card who does not share joint responsibility with the cardholder on the account to opt into the over-the-limit protection or withdraw from the feature.
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Gather The Documents Youll Need When You Ask For A Credit Limit Increase
Your card issuer may want to know your current annual income, employment status and how much you pay for housing each month. Have that information ready to go before you call.
Thats right, we said . You can sometimes ask for a credit limit increase by applying on your card issuers website, but youll have a better opportunity to ferret out information if you speak to a representative on the phone.
If you request an increase over the phone, youll be able to talk to the representative and ask questions or see if theres an amount of additional credit you could get without a hard inquiry, so that may be better in certain situations, says Ganotis.
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How Your Credit Limit Is Determined
Your credit limit is based on different factors like your credit score, income, debt, length of credit history, rate of application for other forms of credit and more.
Your credit score is probably the most important factor in determining your credit limit because:;
- Someone with a strong credit score represents a low-risk opportunity for the bank. Theyre rewarded with a higher credit limit because theyre more likely to pay their bills on time.;
- Someone with a weak credit score represents more risk for the bank. Theyll receive a lower credit limit because they may have a less consistent history of paying off debt.
What Happens When You Exceed Your Credit Limit
When you exceed your credit limit, you’re making purchases beyond what your credit card issuer normally allows. Whether the transaction goes through depends on your credit card company’s over limit policy.
“You may only go over your credit card limit if you sign up for over-limit protection,” said Brian Meiggs, founder of the personal finance site My Millennial Guide. “Otherwise, your transaction will be declined.”
That’s because the 2009 CARD Act requires you to opt-in to paying over-the-limit fees before you can exceed your credit limit. If you don’t opt-in, you won’t pay an over-limit fee. But unless your card issuer specifically allows you to go over your spending limit, the transaction may be declined.
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How Does Overspending Affect My Interest Rates
Spending over your credit limit can affect your interest rates in a few different ways. If you exceed your credit limit on a specific credit card, your card issuer could increase the interest rate you pay on that card. If you have multiple credit cards under your name, your other credit card issuers might notice the change in your credit score and raise their rates as well. If you decide to apply for additional credit cards in the future, lenders could review your credit reports, see that you have a history of spending over your limit and set your interest rates accordingly.
What Do I Do If I Go Over My Credit Limit
Balancing your finances can be a little like walking a holiday-spending tightrope. Should you authorize your credit card company to approve over-the-limit purchases and end up paying hefty fees if you do go over? Do you really want to run the risk of having your card declined when youre in the company of friends, family or business associates? If you decide thats not an acceptable option, you have a few alternatives for minimizing the damage.
Your Credit Limit And Why It Is What It Is
About Those Penalties and FeesIf you exceed your credit limit, you will most likely get hit with an over-the-limit fee. The good news is that the Credit Card Act of 2009 prohibits lenders from charging more than one late fee per billing cycle. The bad news is that if you go over again in the next billing cycle, the fee will probably be more than it was the first time. However, it wont exceed the amount by which youve gone over.
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No More Over Limit Fees
Many credit cards have eliminated credit limit fees that would be charged if you go over your credit limit.;Credit card issuers that do charge fees have to follow certain rules.
If your card issuer does charge a fee, the fee cant exceed the amount that youve gone over your limit. For example, if you go over your credit limit by $15, the maximum fee you can be charged is $15. Check your credit card terms or call the card’s customer service to find out whether you’ll be charged a fee for going over the limit and the amount of the fee you’ll be charged.
Even if your credit card issuer doesnt charge a fee, there may be;other penalties for going over your credit limit. Going over your credit limit may trigger the;penalty rate, the highest interest rate charged on your credit card.;The credit card issuer may raise your minimum payment to compensate for the amount that youve exceeded your credit limit.
Going over your credit limit is a sign that youre not able to manage your credit. Even though they may permit you to exceed your limit, credit card issuers may view it unfavorably. Some credit card issuers may even lower your credit limit or close your credit card account.
What Are The Financial Consequences Of Going Over Your Card Limit
Going over your card’s credit limit can affect you financially in different ways.
“Your interest rates could increase, it could lead to a lower credit score and a lower credit limit, and you can be charged an over-limit fee,” Meiggs said. “Worst-case scenario, your credit issuer could close your account if you habitually exceed your credit limit.”
While the CARD Act effectively eliminated over-the-limit fees, you could still pay them if you’ve opted in. In terms of credit score impacts, going over your limit could negatively affect your credit utilization ratio. This represents how much of your total credit limit you’re using at any given time. Unless your credit limit increases alongside your balances, going over your card’s limit could hurt your utilization ratio and cost you credit score points.
Carrying a larger balance on your cards could also mean paying more interest if you’re stuck with a higher APR. Executing a balance transfer at zero percent can help reduce interest costs. But that isn’t free since it usually means paying balance transfer fees.
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What Happens If I Go Over My Credit Limit
Going over your credit limit is likely to come with consequences. If you didnt enable over-limit protection on your credit card account, your transaction will probably be declined. If you opted into over-limit protection, your charge might go throughbut you could get hit with fees, higher interest rates or lower credit limits. You might even see your credit score drop due to the increased balance on your card. If you make too many over-limit charges, your credit card issuer could close your credit account.
Here are the most common consequences associated with spending over your credit limit:
The limited the amount and types of fees that could be charged for an over-limit transaction. For starters, credit card issuers are only allowed to charge over-limit fees to cardholders who have opted into over-limit protection plans. If you did not sign up for over-limit protection, you wont be charged any over-limit feesbut you also wont be able to spend over your credit card limit.
Why You Should Never Max Out Your Credit Card
Just because you can go over your credit limit doesnt mean you should. Maxing out your credit cards can be disastrous for your credit score and your finances overall.
According to FICO, the credit scoring system more than 90% of lenders use, maxing out your credit cards could drop your credit score by as much as 120 points. And, because credit utilization accounts for 30% of your FICO Score, the damage to your credit can take years to repair.
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Cory is BestCards.com’s “Jack of all trades” and resident credit expert, covering all facets of the credit card space. In addition to credit cards, Cory finds that jogging, cats, and memes are essential parts of a balanced day.
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How To Avoid Exceeding Your Credit Limit
If you’d rather not exceed the amount of credit you have on your card, there are a few things you can do to avoid it.
Budgeting and tracking spending is a good place to start, said Meiggs. A budget is one of the most important personal finance tools you can use to manage your finances and avoid overspending.
Next, you can set up transaction alerts for your credit cards to notify you when you’re getting close to your credit limit. This can help you curb making purchases with the card until you have a chance to pay down some of your existing balance.
It’s also helpful to make note of your credit limit for each card you own. You can request credit limit increases strategically to free up more credit while potentially improving your credit utilization ratio.
Opting out of over-limit fees and protections can make exceeding your credit limit a moot point. But if you decide not to do that, assess your balances and available credit regularly and aim for a credit utilization ratio of 30% or lower, advised Meiggs.
If you plan to apply for new credit cards, including balance transfer cards, do your homework first. Consider visiting Credible to review offers from different credit card companies to find the best match for your needs and spending habits.
How To Pay Down A Credit Card
Aim to pay credit card balances in full each month to avoid interest charges. If thats not possible, paying it off gradually will still improve your credit utilization ratio and get you on the right track. Decreasing credit card usage can also help prevent further trouble.;
Another tip is to pay twice per month, effectively resetting your utilization rate mid-month.;
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Ask Yourself Why You Want A Credit Limit Increase
If youre thinking about asking for a credit limit increase on your credit card, the first step is to assess your current financial situation. Consider the pros and cons of a credit limit increase.
On the plus side, a higher credit limit may lower your credit utilization rate if you keep your balance under control, says Bruce McClary, vice president of public relations and communications at the National Foundation for Credit Counseling.
You can figure out your credit utilization rate by dividing your total credit card balances by your total credit card limits. Having a higher credit limit on one or several card accounts can help keep your utilization rate below 30%.
Then again, a higher credit limit could also lead to trouble. A higher limit may lead some to feel that there is that much more room to spend, warns McClary. Too much of a good thing can be bad, especially if you start opening more accounts with high credit limits.
As is usually the case, its best to spend responsibly and within your means. Just because a higher credit limit may allow you to charge an expensive electronic device or pay for a vacation doesnt mean that asking for a higher limit is the right option for you.
Should You Go Over Your Credit Limit
While spending over your credit limit may provide short-term relief, it can cause long-term financial issues, including fees, debt and damage to your credit score.
You should avoid maxing out your card and spending anywhere near your credit limit. Best practice is to try to maintain a low .
“The golden rule was 30%, and I always say 10% if you really want to get a high credit score,” Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report, tells CNBC Select;of the ideal utilization rate.
If you go over your credit limit, Harzog recommends you sit down and consider why you went over your limit in the first place and review your budget. You should figure out what purchases caused you to spend more and whether you can make any changes to your spending habits.
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Why Should You Avoid Going Over Your Credit Card Limit
You should avoid going over your credit card limit because it will likely cause a drop in your credit score. This is so because the credit reporting bureaus look at your credit utilization . If you exceed 30% credit utilization, your credit score will go down. So, when you use over 100% of your available credit, you will notice a significant drop in your credit score. As such, if you car about your credit score, you should avoid going over your credit card limit.
Furthermore, you should avoid going over your credit limit because you can be charged fees and a higher interest rate on your remaining balance. So, unless youre facing an emergency, you should avoid going over your credit limit, especially if you dont anticipate paying down your balance before your closing date. If you have money in your checking account, you should consider making a purchase that would send you over your credit limit on your debit card. This will prevent you from going over your credit limit.