What Happens If You Go Over Your Credit Limit?

A credit limit represents the maximum amount a cardholder can borrow. Issuers set this limit based on factors like income, credit history, and creditworthiness. Exceeding this amount can lead to various consequences. Understanding these potential outcomes is important for responsible credit use.

Immediate Effects and Fees

When a credit card balance surpasses its limit, repercussions depend on whether the cardholder opted into “over-limit protection.” If not opted in, transactions attempting to exceed the limit are generally declined.

If opted into over-limit protection, the transaction might be approved, but with an over-limit fee. An over-limit fee cannot exceed the amount by which the limit was exceeded. For a first instance, the fee can be up to $25, and for a second instance within six months, it can be up to $35. An issuer can only charge one over-limit fee per billing cycle. Beyond over-limit fees, other charges like interest or late payment fees can be triggered if the account balance makes minimum payments difficult. Late fees average around $32 and can increase for repeat occurrences.

Impact on Your Credit Score

Exceeding a credit limit can affect a cardholder’s credit score, primarily through the credit utilization ratio. This ratio compares the amount of credit used to the total available credit. For instance, a card with a $1,000 limit and a $900 balance has 90% utilization. Credit scoring models, such as FICO and VantageScore, consider this ratio a major factor, accounting for 30% of a FICO score and 20% of a VantageScore.

A high credit utilization ratio indicates greater reliance on borrowed funds and is viewed as a higher risk by lenders. A ratio below 30% is recommended for a healthy credit score. Exceeding the credit limit pushes this ratio to 100% or more, leading to a notable score decrease. Even if overall credit utilization across all accounts is low, high utilization on a single card can still negatively impact the score. If exceeding the limit leads to difficulty making minimum payments, subsequent late payments will further harm the credit score, as payment history is the most influential factor in credit scoring.

Steps to Address the Situation

When a credit card balance goes over the limit, taking prompt action can help mitigate negative consequences. The most immediate step is to make a payment to bring the balance below the credit limit. This action reduces the outstanding amount, preventing further over-limit fees in subsequent billing cycles and beginning to lower the credit utilization ratio. Paying as much as possible beyond the minimum payment is generally beneficial.

Contacting the credit card issuer is another important step. While not guaranteed, some issuers may be willing to waive a first-time over-limit fee, especially if the cardholder has a good payment history. Discussing the situation with the issuer can also provide insights into payment options or potential assistance programs.

It is also beneficial to review personal spending habits and establish a budget to prevent recurrence. This involves tracking income and expenses to ensure that monthly outgoings do not regularly approach or exceed credit limits. Understanding statement closing dates and payment due dates is also important to manage balances effectively and avoid unintentional over-limit situations.

Potential Longer-Term Outcomes

If an over-limit situation is not promptly resolved or becomes a recurring issue, more sustained consequences can arise. Credit card issuers may perceive persistent over-limit behavior as an increased risk, potentially leading to a reduction in the credit limit or even the closure of the account. An account closure, especially if initiated by the issuer, can negatively impact the credit score by reducing the total available credit, thereby increasing the credit utilization ratio across remaining open accounts.

Continued high balances, particularly those sustained above the credit limit, can also result in significantly higher interest charges over time. Many credit card agreements include a penalty Annual Percentage Rate (APR) that can be applied if a cardholder consistently exceeds their limit or misses payments, substantially increasing the cost of borrowing. The ongoing negative impact on the credit score due to high utilization and potential late payments can make it harder to qualify for new credit, loans, or favorable interest rates in the future. Lenders view a history of exceeding limits as a red flag, which can lead to loan denials or higher borrowing costs. In severe cases, if the debt becomes unmanageable and payments cease, the account could eventually be sent to collections, which has a significant and prolonged negative effect on credit history.