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Every credit card comes with a credit limit, which is the amount of money you are allowed to borrow with the card. Exceeding this threshold can result in a variety of negative consequences, from credit damage to embarrassing moments at the checkout counter. For this reason, it's important to understand what can happen when you go over your credit limit, and why it's smart to pay attention to your running balance.
What Is a Credit Limit?
A credit limit is the maximum amount that you can charge on a credit card. As a revolving credit account, there is no predetermined payoff date for the amount you borrow. You can charge up to the credit limit and pay at least the minimum amount due, with any remaining balance shifted over to the next month—with interest added.
The credit limit that's attached to your card is determined by the issuer when you apply for the card, and depends on three basic factors:
- Your credit report and score: Your history with credit is a major factor in the card's credit limit. After you apply, the issuer will review one or more of your credit reports or credit scores provided by the three consumer credit bureaus: Experian, TransUnion and Equifax. If your credit score is low (or you don't have one), you might be perceived as more of a credit risk, so the limit will likely be on the low side. If your credit score is high, the issuer will perceive you as less of a credit risk and, in turn, could grant you a higher credit limit. The number of open accounts you have and their credit limits may also be factored in—a card issuer might want to see how you're doing with your existing cards.
- Your financial circumstances: The issuer also considers your income, existing debt and other financial obligations. You would list those details on the credit card application. If you have a lot of available cash you can use to cover your credit card bill, the card issuer may bump up your limit.
- The credit issuer's internal factors: The credit card issuer may extend higher or lower limits based on how much money it is comfortable lending. Broad economic conditions and the lender's own financial circumstances are generally taken into account. Additionally, some accounts are designed as starter cards that have predetermined credit limit maximums, such as a secured card where the limit matches the security deposit.
Be aware that a credit limit and available credit are two separate concepts. The credit limit is the amount that you can borrow, but the available credit is the amount you can borrow minus any outstanding debt. So if your credit card has a $5,000 credit limit, and you owe $4,000 on it, your available credit is $1,000.
How Does Going Over Your Credit Limit Work?
Depending on your credit issuer, you may be able to spend more than the credit limit that's attached to your account. Instead of the transaction being declined when you attempt to pay, it can go through as long as the issuer allows it. That can happen if you have a long history of treating that account responsibly. You may also have opted in for over-limit protection, which gives you the opportunity to charge more than your credit limit.
But there are several negative consequences you may face for going over your credit limit. What they can be depends largely on the credit issuer's policies and your credit history, as well as whether you opted in for over-limit protection.
Common outcomes include:
- Declined purchase: Unless the issuer approves the purchase or if you enrolled in over-limit protection, the transaction will not go through if you have already hit your credit limit. That can put you in a bad financial place if you need something and have no other way to pay.
- Extra costs: Although the advantage of over-limit protection is that you can charge more than you're technically allowed to, the disadvantage is that the credit issuer can charge you a fee for that privilege. According to the federal Credit CARD Act, the fee can be $25 the first time you go over the limit and $35 other times you do so within a six-month period. If you make this a frequent practice, those fees will rack up. There's also the larger interest charges a maxed-out balance is likely to incur.
- Account goes into default: If you go over your credit limit, your account may be considered in default. The credit issuer may then hike up your interest rate and reduce your credit limit. It may even cancel or suspend the card or increase the minimum requested payment.
- Sticker shock once a no-interest period ends: If your card offers a 0% APR intro period, you may be tempted to build up a high balance. But a balance that is at or over the limit can be a challenge to repay. If you don't delete the balance by the time the card's (likely much higher) ongoing rate kicks in, the debt could easily wind up being much more expensive than you expected.
How Going Over Your Credit Limit Can Affect Your Credit
Credit utilization is one of the primary factors in the two most commonly used credit scores: FICO® Score☉ and VantageScore®. Utilization is usually expressed as a percentage; it'll show how much of your available credit you're using on a per-card or a total basis.
A low credit utilization ratio is attractive to lenders and positively impacts a credit score because it shows that you're using credit cards as payment tools for things you can afford. Conversely, charging more than the limit can be an indication that you are having financial problems.
As a general rule, it's best to keep your total credit utilization rate to below 30%. Practically speaking, this means that if your credit card's limit is $10,000, for example, the balance you roll over to the next month should be less than $3,000. When it comes to your utilization rate's effect on your credit scores: the lower, the better.
How to Avoid Charging Past Your Credit Limit
It can be easy to lose track of how much you're spending with your credit card and then find yourself dangerously near the limit. You can avoid this situation with a few strategies:
- Charge and pay. You will never have to wonder whether or not you're close to the limit if you pay off your charges right away. Download your bank's app to make the transaction immediately. Charge $300 worth of groceries? Send $300 to your credit card issuer before getting in the car and driving away.
- Set a fixed charging amount for the month. To keep your credit utilization ratio under 30%, figure out how much that will be for your card and stick to it. If your card's credit limit is $1,000, $300 will be your personal limit.
- Review your statements weekly. You can prevent balances from getting out of hand by pulling up your credit card statement at least weekly. If the amount you owe is creeping up, stop charging.
- Request a credit limit increase. It's entirely possible that your credit limit is simply too low for your lifestyle needs. If you have been a good cardholder and your credit reports and scores are in great shape (especially if you've never missed a payment), appeal to the issuer for a credit limit increase. It will also analyze your income and credit habits, and as long as you meet the issuer's criteria, it may increase your limit.
Read Your Credit Report to Stay Informed
Although going over your credit limit on the rare occasion isn't a tragedy, it's best to not make it a habit. Reviewing your credit report on a regular basis will also help you maintain awareness. You can access your free Experian credit report any time you want. There are no credit scoring repercussions for checking your own report, and you'll know what information is being factored into your credit scores.