Can You Go Negative on a Credit Card?
Clarify the common confusion around "negative" credit card balances. Understand limits, over-limit situations, and how to manage your credit responsibly.
Many people wonder if a credit card balance can go “negative,” often associating it with a checking account. However, a credit card is a borrowing tool, not a deposit account. While a credit balance occurs when the issuer owes you money, the common concern about “going negative” typically refers to exceeding the credit limit.
Understanding Credit Card Balances and Limits
A credit card has a pre-set spending limit, the maximum amount a lender allows you to borrow. Your current balance is the amount you owe, including purchases, interest, and fees. Available credit is the difference between your credit limit and current balance, indicating how much more you can spend. A credit balance occurs when payments or refunds exceed the amount you owe, meaning the credit card company owes you money. This can happen if you overpay your bill, receive a refund for a returned item, or get a statement credit.
When a Balance Exceeds the Limit
Credit card issuers typically decline transactions that would push your balance over the credit limit. However, a balance can exceed the limit if you have opted into “over-limit protection.” The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 requires cardholders to opt-in for transactions to be approved that would cause the balance to exceed the limit. Without this opt-in, transactions that would put you over the limit should be declined. Even without new purchases, accrued interest, annual fees, or other issuer charges can sometimes push a balance slightly over the limit.
Implications of Exceeding Your Limit
Exceeding your credit limit, especially with over-limit protection, can lead to financial penalties. Issuers may charge an over-limit fee, which, by federal law, cannot exceed the amount you went over the limit. For example, if you exceed your limit by $35, the fee cannot be more than $35. The first over-limit fee is capped around $27, with subsequent fees within six months capped at $38.
Going over the limit also negatively affects your credit score by significantly increasing your credit utilization ratio, the amount of available credit you are using. Credit utilization accounts for about 30% of your FICO® Score; a ratio over 30% is viewed less favorably by lenders. Repeatedly exceeding the limit may also result in the issuer increasing your interest rate, reducing your credit limit, or closing your account.
Strategies for Avoiding Over-Limit Situations
Proactive management helps prevent your credit card balance from exceeding its limit. Regularly monitoring your current balance and available credit through online banking or mobile apps helps you stay informed. Setting up account alerts from your card issuer can provide notifications when your balance approaches or exceeds a certain threshold. These alerts help you adjust spending before incurring fees.
Carefully consider whether to opt into over-limit protection; declining this feature means transactions exceeding your limit will be denied, avoiding associated fees. Budgeting effectively and making payments, ideally more than the minimum due, can help maintain a healthy balance and utilization ratio.