It’s no secret that spending beyond your credit card’s limit is a bad idea.
When you apply and are approved for a credit card, your issuer sets a credit limit to which you are allowed to spend each month. If you clear that limit every month, you won’t incur interest on the card. But where many people get into trouble is charging more to the card than they can realistically pay off. This may happen for any number of reasons, including ongoing financial struggles or one-time large expenses.
But what are the consequences of charging your card over the limit? And how can you avoid doing so?
What fees or interest rate spikes could I expect for overspending?
Maybe you’ve simply lost track of the outstanding balance on your credit card and try to make another purchase. Or your most recent payment hasn’t cleared, but you think it’s safe to use your card. Uh-oh! Now you’re over your credit limit.
Since the CARD Act of 2009 went into effect, this has become more uncommon. Credit card companies can no longer accept a transaction that would put you over the credit limit without your permission. But if you opt-in to “over-limit protection” when you apply for the card – or if you ever call to opt in — then you could face over-limit fees.
These fees are outlined in the terms and conditions of your credit card, but may still come as a surprise for many people.
How much are over-limit fees, usually?
If you opt in to allow your issuer to accept over-limit transactions, you will generally pay a penalty of up to $25 for your first offense and $35 for additional over-limit transactions. The fee, however, cannot exceed the amount you spend over your limit.
Ways you may go over the limit
Often, it’s not a purchase that puts you over your limit. If you have an outstanding balance close to your limit and then your credit card issuer adds your monthly finance charges (interest), you could be over your limit without realizing it. You will still get hit with the over-limit penalty.
If your credit card issuer reduces your credit limit – causing your balance to exceed your limit – the company cannot charge an over-limit fee until one billing period has passed, giving you the opportunity to pay down your debt so you are within the limit again.
Effects of an over-limit credit card
In addition to over-limit fees, your credit card issuer may prohibit you from cashing in on your credit card rewards while you are over your credit limit. You won’t lose the rewards permanently unless your credit card issuer cancels your card. But you may not be able to use them until your account is current and below the limit.
As soon as you realize you’ve exceeded your credit limit, you should make a payment to bring your balance below that limit. For a first-time offense, especially if you’re a good customer with a solid track record of on-time payments and staying below your credit limit, you may be able to call your credit card issuer and have the over-limit fee waived.
How does overspending affect my credit score?
That $25 fee, though, isn’t the only consequence of exceeding your credit limit. Your credit score could also drop significantly. The lower your credit score, the harder it is to obtain additional credit or to get competitive interest rates on loans in the future.
Your credit utilization ratio, or your outstanding balances compared to your available credit, makes up 30 percent of your FICO credit score, the scoring model used by many lenders. Generally, you should aim to keep your utilization below 30 percent. If your credit utilization exceeds your available credit (either on any one card or as a whole), your credit score could drop significantly.
Bring your utilization rateback down before your account statement closes, so your credit card issuer won’t report the high utilization to the credit bureaus, so you can preserve your credit score.
How does overspending affect my interest rates?
If you go over the limit frequently, or if your balance continues to hover over your spending limit, your credit card issuer may raise your interest rate.
Remember that being over the limit may also lower your credit score. So, if you apply for a new credit card, the issuer could assign you a higher interest rate after reviewing your credit file. This may cost hundreds or thousands of dollars in added interest charges over time if you continue to carry a balance.
How much debt can I take on before my credit card is cancelled?
If you exceed your credit limit only once in a while, pay down that debt when your next bill is due and always pay on time, you probably don’t have to worry about your creditor closing your account.
However, you might be concerned about how much you can charge before your credit card is cancelled if you consistently carry high balances or remain above your credit limit. There is no definitive answer, as it varies based on your individual credit score, your credit history and even your credit card provider.
Credit card companies may close the accounts of customers they deem risky; if your issuer feels like you are taking on more debt than you can handle, that may be reason to close your account.
You may also run into trouble making payments you can’t afford if you overspend often. Your minimum monthly payment on a credit card includes any balance that is over your credit limit. Typically, if you fail to make your minimum payments for up to 90 days, or three billing cycles, your issuer may close your account. Meanwhile, interest and penalties will continue to accrue, driving your balance even higher.
If you are struggling with credit card debt and can’t make the minimum payment, call your credit card issuer to negotiate a payment arrangement, keeping your account open while you work to bring it current.
Determine how much debt you can handle
Before you make a purchase that could put your credit card close to its limit, determine how much credit card debt you’re able to take on.
Experts recommend keeping your credit utilization below 30 percent of your total available credit. If you stick to that limit, you won’t have to worry about interest charges putting you over your credit limit.
Just be careful when making a big purchase. If a purchase puts you close to your limit, be sure to budget so you can pay it off before interest charges put you over the limit.
Should I opt into over-limit protection?
Taking advantage of “protection” on your credit card may sound safe, but when you consider the fees associated with exceeding your credit limit, plus the potential damage to your credit score, it’s better to remain opted out. Instead, avoid overspending on your credit card.
How can I avoid going over my credit limit?
If you worry that you might go over your credit limit, consider splitting your purchase between two credit cards or using both cash and a credit card.
Your credit card issuer may grant a credit limit increase for emergency purchases when you don’t have cash on hand or another credit card. Be prepared to undergo a review of your account history, and a check of your credit score or a credit inquiry, to determine if you qualify.
A credit limit increase may also help if you consistently approach your credit limit each month. You’re more likely to be granted an increase with a great credit score and history of timely payments.
Pay close attention to your monthly statements and the charges you make throughout the month, and aim to keep your credit utilization below 30 percent in order to avoid costly over-limit fees and other negative consequences of spending beyond your credit limit.