Each of your credit cards has a spending limit that you are expected to meet. But what if you go over your credit limit? Let’s explore.
How credit limits work
When you get a credit card, it comes with a spending limit that dictates how much you can charge at one time. This limit is based on factors such as your credit score and your income. If you have great credit and an above average salary, you could be rewarded with an above average credit limit.
Once you reach your credit limit, your credit card will usually be declined when you try to use it. For example, let’s say you have a credit card with a spending limit of $ 5,000. If you have accrued $ 4,800 in fees and attempt to charge a $ 500 purchase, your card will likely be declined because you only have $ 200 more in fees before you reach your maximum limit.
What happens if you exceed your credit limit?
Due to the Card Accountability Responsibility and Disclosure Act, which was passed in 2009, it has become more difficult to exceed your credit limit. Under this law, you must purchase over-limit protection before your credit card issuer can allow you to exceed your limit.
This protection comes at a cost (a charge from your credit card company), so many consumers don’t choose. And if you didn’t choose it, your credit card issuer must decline any transaction that takes you over your current credit limit.
If you have chosen the option to exceed your credit limit, you will be charged an overage fee. Your credit card issuer may charge only one of these charges per bill cycle and one additional charge over the next two bill cycles.
If you haven’t signed up and try to take a charge that will cause you to exceed your credit limit, the transaction will usually be declined. The merchant in question will let you know that your transaction was unsuccessful, or if you try to buy something online, you will find that your purchase cannot be completed.
Consequences of going over your credit card limit
Going over your credit card limit can be embarrassing, especially if your credit card is declined in a public place, such as a store or restaurant. But there can be repercussions beyond that.
As mentioned, you might have to pay a fee if you go over your limit. Your credit card issuer may also start charging higher interest rates on your account, or even shutting down your account altogether. Or, your credit card issuer may lower your credit limit to reduce their risk in the future.
Additionally, accumulating too high a credit card balance can increase your credit utilization rate, which measures how much available credit you are using at one time. Too high a ratio could cause significant damage to your credit score. You don’t necessarily need to meet or exceed your credit limit for your usage rate to hit an unhealthy level, but if you’ve gone over your credit limit, you can bet your credit score has suffered. .
How to avoid going over your credit limit
It’s best to avoid going over your credit limit, if possible. Here’s how.
Don’t just check your balance at the end of your billing cycle
Sometimes people go over their credit limit because they just lose track of how much they spent. It happens to the best of us. To avoid this, be sure to check your credit card balance every week. If you see any of them starting to climb, you’ll need to be careful about charging for expenses until your billing cycle ends and you’ve paid off some (if not all) of your balance.
Respect a budget
Keeping a budget can help you avoid going over your credit limit. If you plan your spending carefully, you may be able to avoid a scenario where your bills exceed your income and you will be forced to fall back on your credit cards.
Have money in the bank
Another way to avoid going over your credit limit is to have a healthy emergency fund. A good rule of thumb is to save three to six months of living expenses. This way, you won’t be forced to charge unexpected expenses that can’t be charged to a credit card. Instead, you will have the option of covering these costs by drawing on your savings. Of course, an emergency fund can’t be built overnight, but you can do your best to top up yours over time.
Pay off existing credit card debt
If you have a balance on your credit cards, you might want to try paying off your cards before making more purchases with them and instead using cash for now. Again, this is something you would do over time. A good option in this regard is to see if you qualify for a balance transfer. If you can transfer your existing balances to a new credit card with a lower interest rate or an introductory 0% interest rate, your debt might become easier to pay off.
Apply for a higher credit limit
If you have a valid credit card, you can always ask your issuer to increase your credit limit. Increasing your credit limit is a particularly viable option if your income has increased since you got your first credit card or if you have a good credit rating. Granted, a higher credit limit could encourage you to spend more. But it can also offer you more protection. In emergency situations, having a higher credit limit gives you more leeway when events beyond your control occur.
Try to stay within your credit limit
Going over your credit limit can have negative consequences. If you’ve gone over your credit limit, don’t worry. Instead, take steps to prevent it from happening again.
At the same time, take a look at your different credit cards and make sure you know the spending limit for each card. If you don’t have this information in mind, you’ll be more likely to accidentally charge too many expenses and end up with a mess on your hands.