Each and every credit card will come with a credit limit. A credit limit is essentially just the amount of money you are allowed to borrow alongside the card.
Going over this limit has a set of consequences, all of which are not good. It can damage your credit, or lead to some very embarrassing moments at the checkout counter at your local store.
This is why it is so important that you understand the repercussions of going over your credit limit, and pay attention to the balance you are running.
What Is A Credit Limit Exactly?
Let us begin with what exactly a credit limit is. This is the maximum amount you can charge on a credit card. With a revolving credit account, there will be no pre-decided payoff date for the amount of which you are borrowing.
You will be able to charge up to the credit limit, and you can pay at least the very minimum amount due.
You can then get the remaining balance shifted over to the following month, with an interest added on top.
The issuer who provides you with the card will set the credit limit, which will depend on various factors.
- Your credit report and score: The history of credit on your account will play a major role in your credit limit. Once applied, your report will be reviewed. If your score is low, your limit will be low. If your score is high, your limit will be high.
- Current financial circumstances: The issuer will consider your income, existing debt, and other financial information. These should be listed on your credit card application. Your limit may be increased if you have available cash to cover your bill.
- Internal factors: The issuer might also extend a lower or higher interest limit based on the amount they are happy with lending. Also, some credit accounts will be made as starter accounts with a set limit; this is often the case with secured cards.
Credit limits and available credit are not the same, and this should be remembered. The limit is how much you can borrow, and the available credit is what you can borrow, with any outstanding debts deducted.
Going Over Your Credit Limit – How Does It Work?
You may be able to spend above the limit depending on the issuer. In this case, instead of your transaction getting declined, it will go through as long as allowed by the issuer of your card.
This can be the case if you have always been a responsible borrower in the past.
However, if you go over your credit limit, you face a series of negative consequences. These consequences depend on the lender’s policies and your credit history. It also depends on if you have over-limit protection.
Consequences can include the following:
- Unless your credit card issuer approves your purchase, or if you applied for over-limit protection, your transaction won’t go through if you hit your limit already. Which can put you in a tricky place financially if you have no other payment methods.
- You can also incur extra costs. While over-limit protection allows you to charge more than you should, there are associated fees. It could be $25 the first time, and $35 consecutive times. If it is a recurring thing, it can be very expensive.
- Your account can also go into default. This means you may end up getting your interest rate raised and your limit reduced. Your card may even get suspended or canceled as well.
- You can also face sticker shock when 0-interest periods end. You can build up a high balance if your card has 0% APR as an introductory period. But, if it is over the limit, it can get hard to repay; then if you do not delete this by the card’s ongoing rate start date, it could end up being even more expensive
How Going Over Your Credit Limit Affects Your Credit
It will be expressed as a percentage, showing how much of the available credit you have on a card you are actually using on a total or per-card basis.
If you have a low utilization rate, then lenders will find you more attractive, and it will positively impact your score as it will show that you are using your cards as payment tools only for things that you can actually afford.
If you charge more than your limit, this shows lenders that you are actually having financial issues.
You should try to keep your utilization rate under 30%. So if your limit were $2,000, ideally you would want to keep your rollover balance below $600.
Basically, the utilization rate should be as low as possible; the lower it is, the better it is.
How To Avoid Going Over Your Credit Limit
We are all guilty of losing track of how much we spend on our credit cards. There are some ways you can avoid going over your limit:
- Charge and pay. Make the transaction straight away.
- Set a fixed amount per month to charge.
- Review your spending statements on a weekly basis.
- Request a limit increase if the limit is too low for your lifestyle needs, and you are a respectable cardholder.
Your credit card limit will be set by your issuer; if you go over this limit you could incur charges, damage your credit score, and get yourself into some pretty embarrassing situations if you try to use it at the store and your issuer does not approve a purchase.
It is best to avoid going over the limit if possible!