What Happens If You Go Over Your Credit Card Limit?

A credit limit represents the maximum amount of money a financial institution allows a cardholder to borrow on a credit card account. Card issuers set this limit based on factors like income and credit history. When a cardholder attempts to spend more than this allocated amount, they are said to go over their credit limit. Understanding the implications of exceeding this limit is important for managing personal finances effectively.

Immediate Transaction Outcomes

When a cardholder attempts a transaction that would push their balance beyond the credit limit, one of two primary outcomes occurs. The transaction may be declined at the point of sale, preventing further charges until the balance is reduced.

Alternatively, the transaction might be approved if the cardholder has opted in for over-limit transactions. Opting in for over-limit transactions allows purchases to go through even if they exceed the credit limit. Without this explicit consent, card issuers are prohibited from charging over-limit fees if they allow the transaction to proceed. If a cardholder has not opted in, a declined transaction prevents potential fees.

Associated Costs

Exceeding a credit limit can result in financial penalties, primarily through over-limit fees. These fees are charges levied by credit card issuers when a card balance surpasses its limit. Such fees can range from approximately $25 to $35 for the first instance and potentially higher for subsequent occurrences within a six-month period. They are applied per billing cycle rather than per individual transaction.

The Credit CARD Act of 2009 introduced regulations to protect consumers from excessive over-limit fees. Under this act, card issuers can only charge over-limit fees if the consumer has opted in to allow such transactions. The fee charged cannot exceed the amount by which the cardholder went over their limit. For example, if a cardholder exceeds their limit by $35, the fee cannot be more than $35. Consistently exceeding the limit can lead to other consequences, such as an increased interest rate on the account, often referred to as a penalty APR.

Effects on Your Credit

Going over a credit limit can negatively impact a cardholder’s credit score, primarily through the credit utilization ratio. This ratio represents the percentage of available revolving credit being used. When a balance exceeds the limit, the credit utilization for that card can rise above 100%, which credit scoring models view as a significant risk. Lenders prefer a credit utilization ratio below 30%, and a higher ratio can lower credit scores.

If exceeding the limit leads to missed or late payments, the impact on a credit score can be significant. Payment history is the largest factor in credit score calculations, accounting for about 35% of a FICO Score. Even a single payment that is 30 days late can cause a significant drop in scores. Card issuers may also report the account’s “over limit” status to credit bureaus, which can further reflect poorly on the credit report. Repeatedly exceeding the limit can lead to long-term implications, making it more challenging to obtain new credit, secure favorable interest rates on future loans, or even maintain existing credit accounts.

Steps to Take

If a credit card balance goes over the limit, immediate action can help mitigate negative consequences. One effective step is to contact the card issuer promptly to discuss the situation. Cardholders can negotiate fees or explore options for managing the balance. In some cases, if the cardholder has a strong payment history, they can request a credit limit increase, which can help lower the credit utilization ratio and provide more spending flexibility.

Making a payment as soon as possible to bring the balance back below the credit limit is also important. This reduces the period the account remains over limit and can prevent additional fees or further credit score damage. Regularly monitoring spending and setting up alerts for when a balance approaches the limit can help prevent future overages. Reviewing the cardholder agreement to understand the terms and conditions regarding over-limit policies provides clarity and helps avoid unexpected charges.