What Happens When You Go Over Credit Card Limit?
Exceeding your credit card limit has significant financial and credit implications. Learn what happens next and how to respond effectively.
A credit limit represents the maximum amount of credit a financial institution extends to a cardholder. Exceeding this limit triggers a series of consequences that can affect immediate finances and long-term financial health.
Immediate Transaction and Fee Consequences
When a transaction causes a credit card balance to surpass the credit limit, there are immediate financial outcomes. If a cardholder has previously opted into over-limit coverage, the transaction might be approved, and an over-limit fee will be assessed. This opt-in requirement stems from the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, which mandates consumer consent for such charges. Over-limit fees typically range from $25 to $35 for the first occurrence and can increase for subsequent infractions within a six-month period.
A credit card issuer can only charge one over-limit fee per billing cycle. Federal law stipulates that the over-limit fee cannot exceed the amount by which the credit limit was surpassed. If a cardholder has not opted in for over-limit coverage, the transaction that would push the account over its limit will likely be declined. This decline prevents the assessment of an over-limit fee.
Impact on Your Credit Score
Exceeding a credit limit can significantly impact a cardholder’s credit score through the credit utilization ratio. This ratio compares the total amount of credit used against the total available credit across all revolving accounts. A high credit utilization ratio is viewed negatively by credit bureaus and lenders, indicating a higher risk of financial distress.
Credit utilization is a significant factor in credit scoring models, accounting for 30% of a FICO score and 20% of a VantageScore. Lenders and credit scoring models recommend keeping this ratio below 30% to demonstrate responsible credit management. Going over the limit dramatically increases this percentage, which can lead to a notable drop in the credit score. Credit card issuers report account status and balances to credit bureaus, meaning high utilization can be quickly reflected on a credit report. The negative impact on the credit score can persist until the utilization ratio improves and a positive payment history is re-established.
Credit Card Issuer Responses
Beyond immediate fees, credit card issuers may take additional actions in response to an account going over its limit. One common response is the reduction of the credit limit. This action can exacerbate the credit utilization issue.
Another potential consequence is the imposition of a penalty Annual Percentage Rate (APR). This higher interest rate, which can be as much as 29.99%, may apply to new purchases and, in some cases, the existing balance, significantly increasing the cost of carrying debt. Issuers are required to provide at least 45 days’ notice before applying a penalty APR.
Card issuers might also freeze or suspend charging privileges until the balance is brought back below the limit. This can render the card unusable for purchases. If the balance remains over limit and payments become missed, the issuer may escalate efforts, leading to debt collection processes.
Actions to Take When Over Limit
If a credit card balance exceeds its limit, prompt action is required to mitigate negative effects. Review the most recent credit card statement to identify any over-limit fees and confirm the exact balance.
Contact the credit card issuer to discuss the situation and explore available options. Issuers may be willing to negotiate or waive fees, especially if it is a first occurrence or the cardholder has a strong payment history. Making a payment immediately to bring the balance below the credit limit is an important step. This reduces the outstanding amount, improves the credit utilization ratio, and helps avoid further fees or issuer actions.
Adjusting spending habits is necessary to prevent recurrence. This involves monitoring expenses and prioritizing payments to reduce credit card debt. Creating and adhering to a personal budget can provide a framework for managing income and expenditures, ensuring spending remains within financial means and below credit limits.