What Happens When You Go Over Your Credit Card Limit?
Understand the implications of exceeding your credit card limit, from immediate effects to long-term financial health.
A credit limit represents the maximum amount of credit a financial institution or lender extends to a cardholder for a specific credit card or line of credit. This limit is determined by various factors, including an applicant’s income, employment status, and credit history.
Transaction Declines and Notifications
When a cardholder attempts a transaction that would push their account balance beyond the established credit limit, the immediate consequence is often a declined transaction. The credit card issuer blocks the transaction because it would exceed the maximum allowed credit.
Issuers may also place a temporary hold on the account, preventing further purchases until the balance is brought back below the credit limit. Cardholders might receive immediate notifications from their issuer about the declined transaction or the account being over-limit, often through email, text message, or in-app alerts.
Over-Limit Fees
An over-limit fee is a charge assessed by a credit card issuer when a cardholder’s balance exceeds their credit limit. The ability for an issuer to charge this fee is governed by the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009. Under this federal law, cardholders must “opt-in” or give express permission to their card issuer to allow transactions that exceed their credit limit.
If a cardholder has opted in, the issuer may approve the transaction that pushes the account over the limit and then charge an over-limit fee. If the cardholder has not opted in, the transaction should be declined, and no over-limit fee can be charged. The CARD Act limits these fees; an issuer cannot impose more than one over-limit fee per billing cycle, and the fee cannot exceed the amount by which the limit was surpassed. For instance, if the limit is exceeded by $30, the fee cannot be more than $30.
Federal regulations specify that an issuer may not impose an over-limit fee for more than three billing cycles for the same over-limit transaction. Over-limit fees are distinct from other charges like late payment fees, though both could apply if a payment is also missed. Some major issuers have largely discontinued charging over-limit fees even if a cardholder has opted in.
Impact on Credit Score
Exceeding a credit limit can significantly affect a cardholder’s credit score, primarily through its influence on the credit utilization ratio. This ratio, also known as the debt-to-limit ratio, represents the amount of revolving credit currently being used compared to the total available revolving credit. It is calculated by dividing the total credit card balances by the total credit limits and multiplying by 100 to get a percentage.
Credit utilization is a major factor in popular credit scoring models like FICO and VantageScore. It accounts for approximately 30% of a FICO Score and around 20% of a VantageScore. A high utilization ratio signals increased risk to lenders, and it is generally recommended to keep this ratio below 30% for a healthy credit score. Going over the limit means the utilization ratio will be 100% or more, which can cause a notable decrease in the credit score.
A lower credit score can lead to several adverse financial consequences. Lenders may view individuals with lower scores as higher risks, resulting in less favorable terms for future loans, such as higher interest rates. It can also make it more difficult to obtain new credit, secure rental agreements, or even impact insurance premiums.
Account Management After Exceeding Limit
The most immediate and effective step is to pay down the balance as quickly as possible. Reducing the outstanding amount below the credit limit helps to decrease the credit utilization ratio, which can positively influence the credit score once reported to credit bureaus.
Cardholders should contact their credit card issuer to discuss the situation. This communication can provide clarity on any fees incurred or temporary account restrictions that have been implemented. While the issuer may not waive fees, understanding the account status directly from the source can be beneficial. Close monitoring of the account is also important to track the balance and ensure no additional transactions inadvertently push the account over the limit again.