What Happens If You Overcharge a Credit Card?
Uncover the financial and credit consequences of spending beyond your credit card limit and how to address them.
Credit cards offer a convenient way to manage expenses and provide financial flexibility. Each card has a credit limit, the maximum amount you can borrow. Understanding this limit and the implications of exceeding it is important for maintaining sound financial health. Spending beyond this limit is known as “overcharging.”
Defining Credit Card Overcharge
Overcharging a credit card means your outstanding balance has surpassed the credit limit set by the issuer. Credit limits are established based on factors like your credit history, income, and payment behavior. When a transaction attempts to push your balance beyond this limit, the issuer determines how to handle it.
The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 altered how over-limit transactions are managed. This federal law requires cardholders to explicitly opt-in to allow transactions exceeding their credit limit. If you do not opt-in, any transaction causing you to go over your limit will be declined, and no over-limit fee will be charged. If you have opted in, the issuer may permit the transaction, potentially incurring a fee.
Immediate Consequences of Exceeding Your Limit
When a credit card balance exceeds its limit, if you have opted in, the most direct consequence is an over-limit fee. This fee typically ranges from $25 to $35, though it cannot exceed the amount by which you went over the limit. For instance, if you exceed your limit by $20, the fee charged would be $20.
Federal law limits the frequency of these fees; an issuer can only charge one over-limit fee per billing cycle. If the balance remains over the limit, a second fee might be charged in a subsequent billing cycle, but not more than twice consecutively. Transactions that would put you over your limit, especially if you haven’t opted in, are likely to be declined. The issuer may also send notifications or alerts regarding the over-limit status.
Impact on Your Credit Profile
Exceeding a credit limit affects your credit profile, particularly your credit score. A primary factor influenced is your credit utilization ratio, the amount of credit you are using compared to your total available credit. When you go over your limit, your utilization on that card instantly surpasses 100%, viewed negatively by credit scoring models. A high utilization ratio, considered above 30%, can lead to a drop in your credit score, as credit utilization accounts for a substantial portion of your score.
Consistent over-limit activity can signal increased risk to creditors, potentially leading to a penalty Annual Percentage Rate (APR). A penalty APR is a higher interest rate applied to your entire outstanding balance, making debt repayment more costly. While the penalty APR itself does not directly impact your credit score, the behaviors that trigger it, such as high utilization, are reported to credit bureaus and can negatively affect your creditworthiness. Repeated over-limit instances could prompt the issuer to reduce your credit limit or close your account.
Steps to Address an Overcharge
If your credit card has been overcharged, taking prompt action is important. The most immediate step is to pay down the balance to bring it below the credit limit as quickly as possible. This helps to reduce the impact on your credit utilization and prevent additional over-limit fees in subsequent billing cycles. Contact your issuer to discuss the situation, especially if you believe an error occurred or to understand their policies.
Reviewing your spending habits is important to prevent future overages. Analyze where your money is going and identify areas to cut back. Creating a budget provides a clear picture of your income versus expenses, helping you stay within your financial means. Setting up account alerts for when your balance approaches your credit limit is an effective preventative measure. If you frequently approach your limit, consider requesting a credit limit increase, provided you are confident in your ability to manage a higher limit responsibly.