The cost of going over your credit limit

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All credit cards have one thing in common: They have a credit limit – the upper limit of the cumulative spend that you can put on the card.

If a card has a limit of $ 10,000, you won’t be able to spend more than that amount. This is the theory, but in practice you could go over the limit – and possibly pay a fee to do so.

While there isn’t a one-size-fits-all rule of thumb for how far you can go, experts say you shouldn’t try it. That said, if you make a purchase that is over your credit limit, certain things can happen.

The transaction could be categorically declined, you could damage your credit score, you could face an APR (Annual Percentage Rate) penalty, or you could have to pay an over limit fee – if you said yes to the latter option. .

“The main thing that happens in practice if you try to go over your limit is that the trade will just be declined. But that’s not what happens 100% of the time,” says Ted Rossman, Industry Analyst at Creditcards.com. “Sometimes they’ll actually let the transaction go through. It’s really up to the card issuer’s discretion. (Creditcards.com shares an owner with NextAdvisor.)

Here’s what you need to know about going over your credit limit, the consequences you could face if you do, and how to avoid it.

Why it’s harder now to go over your credit limit

the Credit Cards Act 2009 effectively eliminated over-limit fees, unless cardholders explicitly allow them. Card issuers are now required to obtain buy-in from customers in order to charge for exceeding their credit limit.

But the issuer cannot charge more than one over-limit charge per billing cycle.

If you do not register, the issuer will generally decline any transactions over your limit and will not be able to charge you any fees. You can activate or deactivate the over-limit protection at any time.

“This had the somewhat unintended consequence of encouraging most card issuers to waive these fees, as they didn’t want to bother with the whole sign-up process,” Rossman said, referring to some. card issuers that no longer have the option to register. over-limit programs. But it ultimately depends on the terms and conditions associated with your card.

Before the Credit Cards Act, over-limit fees were another way for credit card companies to make money. They usually allow transactions over the limits and then charge a fee, usually between $ 25 and $ 35. According to the Consumer Financial Protection Bureau, Americans saved over $ 9 billion in over limit fees between 2011 and 2014.

But now there are other possible consequences of going over your credit card limit. If you go over your limit or regularly try to exceed it, your issuer may decide to lower your credit limit, increase your minimum monthly payment, or charge a penalty APR.

That is why you should carefully consider whether you want to register.

“There are all kinds of reasons, like medical bills, divorce or job loss, that can make you suddenly dependent on your credit card. But don’t make it worse than it already is. Don’t agree to go over your limit, ”says Beverly Harzog, credit card expert and consumer financial analyst for US News and World Report.

Should you exceed your credit limit?

Experts say it’s not a good idea to go over your credit limit because the downsides, even if you’ve gone for over-limit protection, usually outweigh the benefits.

Not only can this lead to long term debt and possibly a higher interest rate, but it can also hurt your credit score because your credit is overused when you go over your limit. Credit usage – the ratio of your credit card balance to your overall limit – is the second most important factor that influences your credit score.

“You would be using more than 100% of your available credit. It would definitely have a negative effect on your credit score, ”Rossman said. “When you sign up you agree not to overdraw, so you would technically also be in default of your cardholder agreement. “

If you go over your credit limit, keep in mind that each credit card issuer handles it differently. Here is a brief overview of the potential consequences:

  • Chances are the credit card will be declined
  • You may pay an over limit fee (if you signed up)
  • The interest rate on this credit card could go up
  • The credit limit could go down
  • Your credit score can drop dramatically
  • Credit card account could be closed

If you ever go over your credit limit, maybe it’s time to take a look at your spending and understand why it happened in the first place, Harzog says.

“If you go over your limit, you’re already in trouble by then. Take this opportunity to reassess your budget and perhaps change your spending habits, ”she says. “Do what you can because that’s not the way credit cards are supposed to be used. You pay a lot of compound interest when you have a large balance.

How to avoid going over your credit limit

These tips can hold you accountable for your spending and help you avoid going over your credit limit.

Know your credit limit

Start by checking your online credit card account or app to see the difference between your credit limit and your outstanding balance. Any information about your online account will be more up to date than a copy of your billing statement.

Knowing how much credit is available ensures you stay within your limit.

“It should never be a surprise when you go online and check your available credit,” says Harzog.

Set alerts, set a budget and track your spending

Just as you can keep a constant eye on your bank account, by setting up balance alerts that let you know you’re about to run out of available funds, you can do the same for credit card limits. Setting up a credit limit alert that alerts you, on your phone or by email, that you are about to reach your credit card maximum will prevent any negative consequences.

If you’re about to go over a credit card limit, don’t use that card and pay cash or debit card instead.

“If you’re going to the grocery store and you have to choose between going over your credit limit or using your debit card, using the money you already have might be a better choice in this situation. You want to minimize the damage at this point, ”says Harzog.

Another way to avoid going over your credit limit, if you use credit cards for your spending, is to budget, but that goes along with tracking your spending. Harzog says she’s seen people with budgets in place but not keeping track of their spending, which can be problematic.

“They don’t really care when they’ve spent twice as much on restaurants than they wanted,” she says.

Applications like mint Where You need a budget (YNAB) can track where your money is going and help you set limits on how much you can spend in certain categories.

“Before, I loved to eat out, so I had a limit on how much I allowed my husband and I to spend in restaurants. Something like an app can help you set limits, where you will receive emails or texts that say “Hey, don’t go out”. You’ve reached your limit, ”says Harzog.

Request a credit limit increase

You can also give yourself some breathing space by asking for an increase in your credit limit, but be careful if you are in financial dire straits or prone to overspending. Also, keep in mind that asking for a credit limit increase can lower your credit score if the issuer does a so-called “serious investigation” of your credit report.

If you actually plan to use the extra credit and carry a balance month after month, then asking for a raise is probably not a good idea.

However, if your intention is to simply reduce your use of credit, it could be a smart move.

Before taking any action, ask yourself why you want or need more available credit.

Apply for a balance transfer credit card

If you have a high interest rate and are on a never-ending cycle of trying to pay off your credit card balance, a balance transfer credit card can come in handy.

A credit card with balance transfer gives you time to pay off your debt without paying interest on the balance, usually for a period of 12 to 21 months. In recent months, banks and credit card issuers worried that financially distressed borrowers during the coronavirus pandemic would no longer be likely to default on their credit card balances, so the number of offers balance transfer has declined.

“I don’t see that many balance transfer offers, but that doesn’t mean you can’t get one. If you still have a great credit score, you can transfer that debt to a balance transfer card, ”says Harzog. “Call the card issuer and ask if that’s a possibility.”

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