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By Nicole Dieker, Bankrate
A credit limit is the total amount of money that can be charged to a credit card, including purchases, interest charges and fees. Every credit card comes with its own credit limit, and lenders generally determine these limits based on credit scores and other indicators of creditworthiness. Your credit limit might be $500, $1,000, $5,000 or more. Whatever your credit limit is, spending beyond it is generally a bad idea.
A declined transaction is the most likely consequence of spending over your credit limit. However, it's still a good idea to understand exactly what happens if you go over your credit limit because you'll start experiencing the negative effects of a high credit card balance long before you hit your credit limit or max out your cards.
What happens if I go over my credit limit?
The consequences of over-charging depend on whether you signed up for a credit card or a charge card. Some charge cards don't come with credit limits, as long as you are able to pay off the balance in full every month. Other charge cards offer spending limits similar to credit limits, so pay attention to the fine print.
What happens if you go over your credit limit also depends on whether or not you opted in for over-limit protection, a feature that allows you to spend over your credit limit. Over-limit protection programs give you the freedom to make occasional over-limit purchases, but they also come with significant consequences. Many of the best credit cards no longer offer over-limit protection.
If you didn't enable over-limit protection on your credit card account, your transaction will probably be declined. If you opted into over-limit protection, your charge might go through-but you could get hit with fees, higher interest rates or lower credit limits. You might even see your credit score drop due to the increased balance on your card. If you make too many over-limit charges, your credit card issuer could close your credit account.
Here are the most common consequences associated with spending over your credit limit:
- Your credit card could be declined
- You could pay an over-limit fee
- Your interest rates could go up
- Your credit limit could go down
- Your credit score could drop
- Your credit issuer could close your credit account
- Fees for going over your credit limit
The Credit CARD Act of 2009 limited the amount and types of fees that could be charged for an over-limit transaction. For starters, credit card issuers are only allowed to charge over-limit fees to cardholders who have opted in to over-limit protection plans. If you did not sign up for over-limit protection, you won't be charged any over-limit fees-but you also won't be able to spend over your credit card limit.
The Credit CARD Act also limited credit issuers to one over-limit fee per billing cycle and restricted the amount that issuers could charge in fees. However, card issuers are not allowed to charge an over-limit fee that is greater than the amount charged over the limit. If you exceed your credit limit by $10, for example, your over-limit fee can be no higher than $10.
Should I go over my credit limit?
It is almost never a good idea to go over your credit limit. The consequences of going over your credit limit, even if you opted into over-limit protection, tend to outweigh the benefits of making an additional purchase on your credit card.
Since spending over your credit limit can increase your interest rates and lower your credit score, try to avoid going over your credit limit except in cases of absolute emergency. Instead, look for alternative ways of making the payment. If you have enough money in your checking account to cover the cost, for example, try putting it on a debit card. Yes, credit cards are more secure than debit cards for most types of purchases-but if the choice is between using debit and going over your credit limit, pull out your debit card.
Can I change my credit limit?
If you'd like to change your credit limit, you can request a credit limit increase from your card issuer. In most cases, you can request a higher credit limit by logging into your credit card account and making the request online-no need to call customer service or wait on hold. Your credit limit increase request is more likely to be approved if you have good credit, so check your credit score before contacting your lender.
When you request a credit limit increase, your lender will perform a hard credit inquiry on your credit report. This might reduce your credit score by a few points, but if your credit limit request is approved, your new credit should lower your total credit utilization and give your credit score a boost.
Does going over my limit affect my credit score?
Going over your credit limit has a good chance of lowering your credit score. Why? Because 30 percent of your credit score is based on your credit utilization ratio-that is, the ratio of your available credit to your existing debt. If you go over your credit limit, your debt is exceeding your available credit on that account. Depending on how many cards you have, this doesn't necessarily mean that you'll be maxing out all of your credit, but if it takes you over 30 percent utilization across all your accounts, it's still likely to hurt your credit score.
How does overspending affect my interest rates?
Spending over your credit limit can affect your interest rates in a few different ways. If you exceed your credit limit on a specific credit card, your card issuer could increase the interest rate you pay on that card. If you have multiple credit cards under your name, your other credit card issuers might notice the change in your credit score and raise their rates as well. If you decide to apply for additional credit cards in the future, lenders could review your credit reports, see that you have a history of spending over your limit and set your interest rates accordingly.
Tips to avoid going over your credit limit
If you want to avoid going over your credit limit, it's important to know how much credit is currently available to you. Remember, it might not be a credit card purchase that puts you over your credit limit. If you're carrying a very high balance on your credit card, your monthly interest charges could be enough to take you over the limit. An over-limit interest charge likely won't come with the same consequences as an over-limit purchase, but it's still something you should try to avoid.
Here are four tips to help you manage your credit and avoid going over your credit limit:
- Review your credit card balances regularly. When you log into your online credit card account or app, you should see both your current balance and your available credit. Learn how much credit you have left to spend and plan accordingly to keep spending below that amount.
- Pay off your balances as quickly as possible. Paying off your credit card balances gives you more credit to spend on future purchases. Plus, reducing or eliminating your revolving balances lowers your credit utilization ratio and can increase your credit score.
- Request a credit limit increase. Asking for a credit limit increase is one way to add a little more breathing room to your credit. Be careful not to max out your new credit limit as soon as you get it.
- Apply for a balance transfer credit card. If you are having trouble paying off the balances on your current credit cards, a balance transfer credit card can help. The best balance transfer credit cards offer introductory zero percent APRs that typically last 15 to 21 months, giving you time to pay off your debt without paying interest on your balance.
- Apply for a high-limit credit card. While your credit limit is mostly dependent on your credit history, choosing the right card can help. Credit cards for excellent credit typically dole out higher limits. Check out our recommendations for the best high-limit credit cards.
Bottom line
Going over your credit limit is rarely a good choice. In most cases, your transaction will simply be declined-but if you're close enough to your credit limit that you have to worry about your next purchase or interest charge pushing you over the top, it's time to think about paying off your credit card debt.
If you're worried about going over your credit limit, check your credit accounts regularly. By paying attention to your credit card balances and avoiding purchases that exceed your available credit, you can avoid the consequences of spending over your credit card limit.
See more at Bankrate
