If you’ve ever been short for money and needed to use a credit card to cover the costs, then you may have wondered what would happen if you went over your credit limit. As a credit card holder, it’s important to know what happens when you exceed your limit, as it could lead to some costly fees and penalties.
When you exceed your credit limit, you run the risk of costly fees, accumulated interest, as well as a drop in your credit score. Instead of spending more than you can afford, it’s better to plan carefully if you want to benefit from healthier finances.
What is a Credit Limit?
A credit limit is the maximum amount of money your lender will let you borrow at any given time. This limit is determined when you are approved for a credit card, and typically depends on your income and credit score. With each transaction you make using your credit card, your account balance adds up and reduces the amount you have on your available credit.
The majority of credit card companies will assign you a credit limit when you open an account, typically starting at the lowest suitable lending amount and going up to tens of thousands of dollars based on your financial standing. Even with a good financial record, the average limit on a first credit card is between $500 and $1,000. People with poor credit can expect a limit around $100 and $300. Although you may be pre-approved for a higher amount, it’s important to think about how much you can realistically afford to pay back each month so that you can avoid the many consequences of going over your credit limit.
Can You Go Over Your Credit Limit?
The short answer is yes, you can still use your credit card if you go over your credit limit, but there will be consequences for doing so. Banks may allow you to exceed your limit if you make a purchase that puts you above the limit, but they may also impose an extra fee or higher interest rate on any amount that goes beyond. These fees are outlined in any cardholder agreement, so it’s important to check this if you’re left wondering why you’ve been charged extra fees.
Agreeing to overlimit fees may put you into more financial stress than if your card were to be declined for exceeding the limit. That’s why some issuers have opt-out options to help you avoid them altogether. If you exceed a limit and have opted out of overlimit fees, your transactions will be declined.
Consequences of Going Over Your Credit Limit
Knowing your credit limit and understanding the consequences of going over it is essential for anyone who uses credit cards. Even when you’re feeling financially pressed, it’s important to remember that getting into debt without a plan can have serious consequences.
Let's explore what happens if you happen to go over your credit limit:
1. Higher Fees and Interest Rates
The most immediate consequence of exceeding your credit limit is that you will be penalized with higher fees and interest rates. Credit card issuers can charge up to $30 per month for every time you go over, plus a percentage, up to 2.5%, of the amount that went over.
In addition, they can also increase the interest rate on all outstanding balances on your account for any future purchases. This means that going over your credit limit can end up costing you much more money than you initially thought it would.
2. Limits on Spending and Withdrawing Cash Advances
Another consequence of exceeding your available credit is that banks may lower or even freeze your spending limits until you pay off some of the balance. This means that if an emergency arises and you need more money than usual, there's a chance that your bank won't be able to help you out.
Additionally, banks may also restrict cash advances until some of the balance has been paid off. This could become especially problematic if an emergency arises where cash is needed quickly. If this does happen, you can explore alternative borrowing solutions.
3. Lower Credit Score
Credit score plays an essential role in your financial standing, and going over your credit limit can severely affect your credit score. By determining your credit utilization ratio, which represents the amount of revolving credit you’re using divided by the total credit available to you, lenders can evaluate how well you’re managing your debts.
Moreover, lenders typically prefer that you use no more than 30% of the total revolving credit available to you. That means, exceeding your credit card’s limit will show up as a negative action on your report and bring down your score rather significantly. A lower score could mean higher interest rates and difficulty getting approved for loans with banks and other traditional lenders.
If your credit rating has recently dropped for exceeding the limit on your credit card, there are ways to quickly raise your credit score, so that you can feel more in control of your finances going forward. Raising your credit score is an important financial move, especially if you plan to make a major purchase such as a car or home in the near future.
4. Account Closure
Going over your credit limit once can catch your card issuer's attention, but if it continues to happen, you may risk closing the account altogether. This action tells the company that you can no longer handle the card or the payments associated with it.
Keep in mind that if your account closes, the balance doesn’t just go away. You’ll still have to pay off any outstanding balances, including any additional fees and associated interest. Bottom line, the faster you pay off the debt, the less interest you’ll incur, which is why it’s a good idea to pay more than the minimum monthly requirement.
How to Avoid Going Over Your Credit Limit
Being a responsible borrower means avoiding going over your credit limit whenever possible. But, if you’ve ever gone over, you know how stressful it can be. Not only does it put you in an uncomfortable financial situation, it can also hurt your financial future.
Fortunately, there are ways to avoid going over your credit limit and minimize the impact of future consequences:
1. Know Your Credit Limit
The first step to avoiding going over your credit limit is to know what that limit is. Many people don't pay attention to their credit statements or read them in detail, so they may not even be aware of what their current balance is or what their total borrowing power is.
Make sure you check your statement regularly and familiarize yourself with how much money you are allowed to borrow on each card and how much of that has already been used up. This will help you stay on top of any changes that occur with regards to your credit limit as well as keep track of any payments or purchases made with the card.
2. Set Up Text Alerts
Another great way to avoid going over your credit limit is by setting up text alerts for when the balance reaches a certain threshold. For example, if you set an alert at 70% of your total credit limit, then you'll receive an alert when the balance reaches 70%. This will give you advance warning before reaching full capacity so that you can adjust spending habits accordingly. Plus, if someone else has access to your card (i.e., family members) then this feature can be incredibly useful in making sure they don't exceed the amount without notifying you first.
3. Pay Your Bills On Time
Always make sure that you pay all bills on time and in full each month. This helps ensure that all debts are taken care of quickly and efficiently while also keeping track of expenses that could accumulate quickly if left unpaid for too long (such as interest). Paying bills on time will also help to build good standing with lenders which may result in higher limits or better terms on future loans/cards.
4. Keep Track of Your Spending
Ensure that you keep track of your spending and pay attention to all of the transactions listed on your monthly statement. Reviewing your statement can help to not only ensure you’re spending what you can afford, but also to help identify any suspicious activity or potential errors which could result in exceeding your limit if not addressed quickly. If there are any charges that you do not recognize, contact the issuing bank immediately so they can investigate further and resolve any discrepancies promptly.
Avoid Credit Card Overlimit Fees With iCASH
If you’re looking for an alternative solution to going over your credit limit, then consider using iCASH as your financial resource. With competitive rates and flexible repayment plans, we provide small online loans so that you can have quick access to money without ever having to worry about going over your credit limits or incurring hefty fees or penalties from banks or credit card companies.