Edited by Michelle TipswordCan You Overdraw a Credit Card?
Edited by Michelle Tipsword
Quick Answer
It’s not possible to overdraw a credit card in the same way you can overdraw a checking account. But you can exceed your credit limit if you’ve opted in to your card’s over-limit protection, which also leads to fees and other consequences.
You cannot overdraw a credit card, as overdrafts apply to a bank account with a negative balance. But it is possible to exceed your credit limit.
When that happens, your purchase could still be approved if you've opted in to over-limit protection or if the issuer allows it to go through based on your positive credit history. You'll likely have to pay fees, though, and the issuer may also increase your interest rate or even cancel your card.
It's also possible the charge will be declined, which will prevent you from having to pay fees. Here's what to know about making charges beyond your credit limit.
Can You Overdraw a Credit Card?
You can't overdraw a credit card in the same way you can overdraw a bank account. Since a bank account is funded with cash, it's possible to make purchases or withdraw money from an ATM beyond the amount you have in the account. As a result, the bank may cover the purchase but charge overdraft fees, or the bank could decline the transaction altogether.
Credit cards, on the other hand, are a type of revolving credit. That means you can borrow up to a specified amount from the credit card issuer, called your credit limit, and after you've paid down your debt, borrow again up to the limit. It's possible, though, to go over your credit limit. This will affect your credit score more directly than overdrawing a checking account, and could lead to high fees and other headaches.
Learn more: Steps to Take After Overdrawing Your Account
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What Happens if You Go Over Your Credit Limit?
When you go over your credit limit, what happens next depends on the issuer, its policies and whether you've signed up for over-limit protection. Here are the potential outcomes:
Declined Transaction
The most uncomplicated result is that the credit card company declines the transaction. When this happens, the company won't—and can't, by law—charge you fees.
While you won't be able to make the purchase you've planned to, you won't have to deal with the many repercussions of going over your credit limit. The purchase may be declined if you've chosen not to participate in over-limit protection, or if the credit card company chooses to reject the transaction on its own.
Approved Transaction With Over-Limit Fees
Another outcome is that the issuer allows the purchase to go through, but you exceed your credit limit. This may happen if you've otherwise made payments on time and haven't previously maxed out your card, or if you've opted in to over-limit protection—and the fees that come with it.
Signing up for over-limit protection means you can be charged up to $25 the first time you make charges beyond a credit card's limit, and up to $35 for a subsequent charge over the limit in the following six months. But you can't be charged more than the amount that surpassed the credit limit.
Example: You made a purchase that pushed your credit card balance $15 over its limit, and your card issuer charges $25 for an over-limit fee. Because the $15 balance overage is under the over-limit fee, you will only be charged an over-limit fee of $15.
While you won't have to manage the awkwardness of a declined transaction, an approved transaction with fees may also lead to a higher interest rate, known as a penalty annual percentage rate (APR).
The issuer can raise your interest rate if you regularly go over your credit limit and don't pay fees or bring your balance down. As outlined in the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), an issuer must let you know of any interest rate change 45 days in advance.
The company may also assign you a higher minimum monthly payment, charge you right away for the amount that exceeded your limit or even cancel your account altogether.
Does Going Over Your Credit Limit Affect Your Credit Score?
Going over your credit limit brings your credit utilization rate on that card—the amount of available credit you're currently using—over 100%. That can have a negative impact on your credit score.
Consumers with the highest credit scores typically have credit utilization rates of less than 10%, and anything over 30% generally negatively affects your FICO® ScoreΘ and VantageScore® credit scores.
You'll see the biggest drop in your credit score if you had low utilization before the purchase that maxed out your card. On the other hand, you may not see a big difference if your utilization was already high—but that will have already led to a lower credit score. Credit utilization is a major contributor to the "amounts owed" category on your credit report, the second most important factor in your credit score.
Learn more: How to Calculate Credit Card Utilization
How to Avoid Going Over Your Credit Limit
To avoid the troubles that a maxed-out credit card can cause, take these steps to avoid going over your credit limit:
- Set up credit card alerts. Your credit card issuer may offer the option to enable alerts on your account, which can let you know when your balance reaches a certain point. That can give you the information you need to pause making purchases and pay down the balance to avoid going over the credit limit.
- Disable over-limit transactions. To ensure you never exceed your credit limit, let the issuer know that you want it to decline all over-limit transactions. Even if you've previously opted in the over-limit protection, you can always opt out. Contact your issuer's customer service team to cancel your enrollment in over-limit protection, and opt out whenever you open a new credit card account.
- Request a credit limit increase. If you are often close to or making charges beyond the credit limit, but you're easily able to pay down your balance, you can request a credit limit increase. That will give you flexibility to spend more without incurring fees or other consequences. But it also makes it possible to take on more debt, so be sure to be careful about not overspending.
- Sign up for autopay. If you don't already, set up automatic payments from your checking account to your credit card account for a certain amount—or the full balance—each month. It's important to make sure there's enough money in your checking account to cover the bill and avoid a bank overdraft. But paying a credit card bill automatically can help ensure your balance doesn't grow beyond your credit limit.
The Bottom Line
While you can't overdraw a credit card like you can a bank account, going over your credit limit is similar—and can have even more troublesome consequences. The easiest way to avoid maxing out your credit card or spending beyond your credit limit is to opt out of over-limit protection, and allow the issuer to decline the transaction. Additionally, keep close tabs on your account and bring down the balance before it reaches or extends beyond your credit limit to protect your credit score.
To better understand how your credit card spending impacts your credit score, sign up for free credit monitoring from Experian. You'll get real-time alerts to changes in your credit profile so you can respond quickly to protect your credit scores.
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About the author
Brianna McGurran
Brianna McGurran is a freelance journalist and writing teacher based in Brooklyn, New York. Most recently, she was a staff writer and spokesperson at the personal finance website NerdWallet, where she wrote "Ask Brianna," a financial advice column syndicated by the Associated Press.
Read more from Brianna