If you attempt to make a purchase that takes you over your credit card limit, your credit card company will likely decline the transaction. However, if you opt in for over-limit protection, you may be able to go over your credit card limit, but not without penalties.
It can be tempting sometimes to consider maxing out your credit card to cover some unexpected expenses or make a desired purchase. Getting close to your credit card limit, however, puts you at greater risk of exceeding this limit, which can have a negative effect on your finances and credit score.
Before you pull out your credit card to make that purchase, it’s important to understand what happens if you go over your credit limit. Keep reading to learn more.
Can you go over your credit limit?
The short answer is that it depends.
The vast majority of credit cards come with a credit card limit, which represents the maximum amount you can charge on the card. Common credit card limits include $500, $1,000, and $5,000, but they can be higher. This limit includes the combination of all credit card purchases, interest, and fees.
Credit companies use a variety of factors when determining your specific credit card limit, such as your annual income and information on your credit report, including your payment history, number of credit accounts, and debt ratio. If you continuously pay your credit card payments on time, your credit card company may increase your credit limit.
Whether you can go over your credit limit depends on what type of credit card you have. Since the enactment of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009, many credit card companies no longer allow customers to go over their credit limit.
Credit card companies that do allow this must have their customers opt in for over-limit protection. With this protection, the credit card company may allow the transaction to go through, despite going over your credit limit, but they may also charge an over-limit fee. Just because you can go over your limit doesn’t mean you should.
The Consumer Financial Protection Bureau recommends keeping your credit card usage under 30%. For example, if your credit card limit is $1,000, you shouldn’t have a balance of more than $300. However, many financial experts recommend trying to keep your credit card usage under 10%.
What happens if you go over your credit limit?
In accordance with the Credit CARD Act of 2009, credit card companies can charge an over-limit fee of up to $25 the first time you exceed your credit limit. The second time you exceed your credit limit, the penalty cap goes up to $35. There are some conditions to these fees, including:
- You must opt in for over-limit protection.
- You can only incur one over-limit fee per billing cycle.
- The fee can’t exceed the amount of the overdraft. For example, if your credit limit is $1,000 and you make a purchase that increases your balance to $1,010, you can only incur a $10 over-limit fee.
Consequences of going over your credit limit
Attempting to go over your credit limit may cause one or more of the following to occur.
- Credit card declined: In many cases, your credit card company will decline the transaction if the amount takes you over your credit limit. If this happens, you may not be able to make the purchase unless you have other means of paying for it.
- Over-limit fee: As mentioned above, you may incur an over-limit fee of up to $35 for going over your credit limit.
- Higher interest rates: Your credit card company may also choose to raise your interest rates if you go over your limit.
- Reduction of credit limit: Your credit card company may also choose to reduce your credit limit, at least temporarily until you pay your balance down. Other factors can also impact your credit limit. For example, you may incur a pay cut credit reduction if your annual income goes down.
- Lower credit score: Going over your credit limit or hitting your maximum credit limit can adversely impact your credit score. In fact, your credit utilization ratio, the ratio between your total available credit and the credit you’ve used, accounts for 30% of your overall credit score. Ideally, this ratio should stay between 10% and 30%.
- Lose credit card: If you make a habit of going over your credit limit, you risk having the credit card company close your credit card account permanently.
Steps to avoid going over your credit limit
The best way to prevent facing any of these consequences for going over your credit card limit is to avoid exceeding your limit in the first place. There are a few steps you can take to make sure you never go over your credit limit.
- Frequently check your balance: One of the best ways to avoid going over your credit limit is to know your balance. Be sure to frequently monitor your credit card balance, especially prior to making a large purchase. This small step can prevent you from attempting to use your credit card if you don’t have enough available credit.
- Opt out of over-limit protection: The Credit CARD Act of 2009 requires all credit card companies to obtain your explicit permission to provide over-limit protection. When obtaining a new card, be sure to opt out of this special feature. If you already have a credit card, contact the company and ask what steps you need to take to opt out of the over-limit protection.
- Pay off balance quickly: Do your best to pay off any credit card debt as quickly as possible. The more debt you’re able to pay off, the more available credit you’ll have.
- Increase credit limit: If you’re getting close to your credit card limit or you want to make a large purchase that may take you close to maxing out your credit card, see if you can increase your credit limit.
How to increase your credit limit
Before taking steps to increase your credit limit, it’s a good idea to check your current credit score. Keep in mind that credit card companies take various factors into account when determining your credit limit, including your annual income, payment history, and debt utilization ratio.
A good credit score ranges from 670 to 739, while a very good score ranges from 740 to 800 and an excellent score is anything over 800. It’s recommended you try to keep your credit score at least in the good credit score range if possible.
The best way to increase your credit limit is to contact your credit card company directly and request a credit line increase. You might also try to apply for other credit cards with higher limits.
If you want to avoid going over your credit card limit, the first thing to do is to make sure you opt out of the over-limit protection. You can also take steps to increase your credit limit if necessary. The most important thing is to regularly check your credit card balances and take steps to avoid maxing out your cards.
See where your credit score stands today with a free Credit Report Card.
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