Does Going Over the Credit Limit Affect Your Credit Score?
Discover how exceeding your credit card limit impacts your credit score and overall financial standing.
Going over the credit limit on a credit card means a cardholder has charged more than the maximum amount of credit assigned to their account. This occurs when a transaction pushes the outstanding balance beyond the established credit ceiling. Some transactions might be approved, while others could be declined, depending on the card issuer’s policies and whether the cardholder has opted into over-limit protection.
Impact on Credit Score
Exceeding a credit limit directly impacts a person’s credit score, primarily through the credit utilization ratio. This ratio represents the amount of revolving credit being used compared to the total available credit across all accounts. Credit scoring models, such as FICO and VantageScore, consider this ratio a significant factor in assessing credit risk.
When a credit card balance goes over the assigned limit, the credit utilization for that specific card, and potentially the overall utilization across all accounts, can surge above 100%. A high utilization ratio signals to lenders that an individual might be overextended financially, indicating a higher risk of not being able to manage debt responsibly. Maintaining a low credit utilization, generally below 30%, is widely recommended for a healthy credit score, with single-digit utilization often associated with the highest scores.
The negative effect on a credit score can be immediate and substantial because credit utilization can influence a score quickly, unlike some other factors. While paying down the balance can help a score recover, a history of consistently exceeding limits or maintaining high utilization can leave a lasting negative mark on a credit report. This consistent behavior suggests a pattern of financial strain, which can lead to a significant drop in creditworthiness.
Additional Consequences
Going over the credit limit can trigger several other immediate negative outcomes. One common consequence is the imposition of over-limit fees by the card issuer. These fees typically range from $25 to $40 per instance, though federal law dictates they cannot exceed the amount by which the limit was surpassed. Such fees are generally applied only if the cardholder has opted into over-limit protection, as transactions that would exceed the limit are often declined otherwise.
Exceeding the credit limit can also lead to a review of the account by the lender. This review might result in an increased interest rate. This higher rate applies to new purchases and can make it significantly more challenging to pay down the balance, as a larger portion of payments goes towards interest. In more severe or repeated instances, the card issuer might reduce the credit limit, suspend the account, or even close it entirely, leaving the cardholder responsible for the unpaid balance.
Credit Score Components
A credit score is a numerical representation of a person’s creditworthiness, calculated using various pieces of credit data from their credit report. These data points are categorized into five main components, each contributing a different weight to the overall score. Payment history is the most significant factor, typically accounting for 35% to 40% of a FICO or VantageScore, reflecting the consistency of on-time payments.
Amounts owed, which includes the credit utilization ratio, is another substantial component, making up around 30% of a FICO Score and 20% of a VantageScore. This category assesses how much debt is carried across accounts relative to available credit, highlighting why exceeding a limit is detrimental. The length of credit history, which considers the age of accounts, generally contributes about 15% to a FICO Score.
New credit, reflecting recent applications and newly opened accounts, accounts for approximately 10% of a FICO Score.
Finally, credit mix, or the diversity of different types of credit accounts, typically makes up about 10% of a FICO Score. This component evaluates the ability to manage various forms of credit responsibly, such as revolving credit cards and installment loans.