What Happens If You Go Over Your Credit Card Limit?
Uncover the full financial and credit impact of exceeding your credit card limit, including transaction handling, fees, and your opt-in choices.
A credit limit represents the maximum amount of money a credit card issuer allows a cardholder to borrow and maintain as an outstanding balance. This threshold is established to manage the issuer’s risk exposure and prevent cardholders from accumulating more debt than they can realistically manage. It serves as a financial boundary, delineating the permissible spending capacity on a given credit account.
Transaction Handling When Exceeding Your Limit
When a transaction attempts to push a credit card balance beyond its established limit, the most common outcome is a decline. This automatic denial protects both the cardholder and the issuer, preventing further debt accumulation. However, transactions can sometimes be approved even if they exceed the limit, typically under specific circumstances. For instance, a small overage might be permitted, or a bank may exercise discretion for cardholders with a strong payment history or for certain types of merchants.
Some credit card issuers offer an “over-limit protection” feature, allowing transactions to go through if the cardholder has opted into this service. Without such an opt-in, federal law prohibits card companies from charging fees for overages, even if they approve the transaction.
Fees for Over-Limit Transactions
Should a transaction exceed the credit limit and be approved, cardholders may incur an over-limit fee. This fee is a penalty charged by the credit card company for breaching the predetermined spending threshold. Under the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, such fees are subject to specific limitations and are only charged if the cardholder has opted into over-limit coverage.
The CARD Act restricts the amount of these fees. For a first instance, an over-limit fee cannot exceed $25, and for a second occurrence within six months, it may be up to $35. The fee cannot be greater than the amount by which the credit limit was exceeded. A card issuer is permitted to charge only one over-limit fee per billing cycle, and this fee cannot be imposed for more than three consecutive billing cycles for the same over-limit transaction if the balance remains above the limit.
Credit Limit Opt-In/Opt-Out
The CARD Act of 2009 requires credit card issuers to obtain a cardholder’s explicit permission, or “opt-in,” before processing transactions that would exceed their credit limit and assessing an over-limit fee. If a cardholder does not opt-in, any transaction attempting to go over the limit will be declined, and no over-limit fee can be charged. This ensures consumers control whether over-limit transactions are approved and whether they incur associated fees.
Opting in means the cardholder agrees to the possibility of transactions being approved beyond their limit, along with potential fees. Conversely, opting out ensures that transactions exceeding the limit will be declined, avoiding any over-limit fees. Cardholders can check their current opt-in status and change it at any time by notifying their card issuer. This choice empowers individuals to manage their credit card usage according to their financial preferences and risk tolerance.
Impact on Credit Health
Exceeding a credit limit can impact a cardholder’s credit health, primarily through the credit utilization ratio. This ratio, which compares the amount of credit used to the total available credit, is a factor in credit scoring models, often accounting for 30% of a FICO score. When a balance goes over the limit, the utilization ratio for that card, and potentially overall, can exceed 100%, signaling increased financial risk to lenders.
A high credit utilization ratio suggests that a cardholder may be overextended financially, which can lead to a reduction in credit scores. Even if a transaction is approved, maintaining a balance above the credit limit, or consistently near it, can negatively affect creditworthiness. Incurring over-limit fees, especially if they contribute to financial strain and lead to missed payments, harms payment history, another component of credit scores. Lenders may also view consistent over-limit activity as poor financial management, potentially impacting future credit applications, increased interest rates, or account closure.