If you have a credit card, you probably know that you have a credit limit. But have you ever wondered what happens when you go over your limit?
Keep reading to learn what a credit limit is, why it matters, and the consequences of going over your limit.
What is a credit limit, and why does it matter?
Whenever you get revolving credit (like a credit card or line of credit), the issuer sets a credit limit. The credit limit is the maximum amount of money you can charge on your card or credit line — including purchases, interest, and fees — before having to pay it back.
That means that if you have a credit limit of $5,000, you aren’t allowed to spend more than that amount in a month. Recent data from the credit bureau Experian shows that the average credit limit in the United States (across all cards) is $31,015.
But just because you have a certain credit limit doesn’t mean you should spend that much on your card. That’s because your credit limit doesn’t only determine the maximum amount of credit card debt you can accumulate every month. It also affects your credit utilization ratio, which is an essential factor that affects your credit score.
What happens if I go over my credit limit?
If you spend enough to reach your credit limit, it means you’ve maxed out your card. When you try to make a transaction that pushes you over your limit, there are usually three things that can happen:
- The transaction is denied: This is the most likely outcome because cards don’t offer over-limit protection by default.
- The transaction is approved with a fee: This will only happen if you’ve signed up for over-limit protection.
- The transaction is approved with no fee: This is far less common. It usually only happens with select cards, and only if you have an excellent credit score.
Over-limit protection & fees
Some credit card companies offer over-limit protection. If you sign up for over-limit protection, you consent to pay an over-limit fee in exchange for being allowed to spend more than your credit limit.
Issuers can only charge one over-limit fee per billing cycle, and the fee can’t exceed the amount you went over your limit. That means if you exceed your credit limit by $10, your over-limit fee can’t be more than $10. The maximum over-limit fee is $27 for the first offense and $38 for subsequent incidents within the next six billing cycles.
Over-limit protection can be useful if you don’t mind paying extra and want to avoid the inconvenience of declined transactions. Business credit cards often have over-limit protection to ensure that important purchases go through and prevent costly workflow interruptions.
Some banks have more flexible over-limit policies and may approve an over-limit purchase without charging a fee if you immediately pay back the over-limit amount. This usually only applies to cardholders with excellent credit.
The Credit CARD Act of 2009 prevented credit card issuers from applying over-limit protection by default, so if you didn’t sign up for it, your transaction will most likely be declined, and you won’t be charged any over-limit fees.
No matter which situation applies to you, repeatedly reaching or going over your limit is a bad idea. If you regularly max out your credit card, you can expect to face one or more of the following negative consequences:
- higher interest rates
- higher minimum payments
- lower credit limit
- cancellation of your credit card account
Does going over my credit limit affect my credit score?
Even with over-limit protection, maxing out your credit card will hurt your credit score. That’s because using more credit increases your credit utilization ratio.
Credit utilization is the amount of your total credit limit that you use. For example, if you’ve spent $500 on a credit card with a $5,000 credit limit, you have a 10% utilization rate.
The higher your rate, the more it hurts your credit score. Most experts recommend keeping your credit utilization below 30% to maintain an average credit score. But if you max out your card or spend over the limit, your rate jumps to 100% or more, causing significant damage to your score.
Tips to avoid going over your credit limit
If your credit card balance often reaches or exceeds your limit, you might want to consider taking steps to avoid the same thing happening in the future.
Here are a few ways to keep your credit spending under control:
Sign up for spending alerts
Most credit card issuers offer a service that sends you an alert by email or text message when you reach a specific percentage of your limit, like 50%, 75%, or 90%. Signing up for alerts is a simple way to keep tabs on your spending.
Use a charge card
Charge cards are similar to credit cards, except they don’t have credit limits or minimum payments. That means you can charge whatever amount you want without worrying about going over your limit. But you always have to repay the full amount at the end of your billing cycle, or else the card issuer can charge significant fees.
Alternatives if your credit limit is low
If you have a low credit limit or your limit was recently reduced, several options are available to you.
If your card issuer reduced your limit, you can call them to request an explanation and try to make a case for restoring your previous limit. You should only follow this approach if you have a stable income and a good credit history. Otherwise, it’s best to pay off your card first.
If you have a low credit card limit and want to increase it, you can either request a higher credit limit or wait for your credit card company to offer you an increase.
Many lenders let you request a credit limit increase through your online account or mobile app. You can also call the number on the back of your card. Keep in mind that requesting a limit increase results in a hard inquiry into your credit report, which temporarily hurts your credit score.
Credit card companies also review your account about once a year. If you’ve managed to build your credit score by making your payments on time and keeping your account in good standing, there’s a good chance your card issuer will contact you with an offer.
The bottom line
Going over your credit limit is never a good idea. Not only can it result in over-limit fees, higher interest rates, and higher minimum payments, but it also reduces your available credit and can significantly hurt your credit score.
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