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Watching your credit card balance increase can feel like drowning slowly, especially when you don’t have a way to pay it off. But it feels even worse when you max out the card and you still need to use it for expenses.
Charging over your limit, whether it’s on accident or on purpose, you have a variety of consequences that range from stressful and embarrassing—like having the transaction declined—to expensive. Here’s what to expect when you go over the limit, and how to avoid credit trouble.
What Is a Credit Limit?
A credit limit is the maximum balance you can carry on your credit card at any given time.
Credit limits are typically based on your credit scores. The higher your scores, the higher the limits may be. Other factors that can influence your limit might include your income, and how much of it goes to your rent or mortgage.
Your credit limit is determined by your creditor when you open the account, and it can be increased by the creditor (if your credit scores improve) or upon your request (if the creditor approves).
Can You Go over Your Credit Limit?
Some credit cards allow you to spend over the limit, but you’ll have to specifically opt-in or request it from the creditor. If you don’t, your transaction could be declined.
Keep in mind that even if the creditor allows over-the-limit transactions you can still face consequences for spending over the limit. So, what happens if you go over your credit limit?
- Overlimit fees up to $35 per billing cycle
- Decline of future transactions
- Increased interest rate (APR) on your account
- Account closure
- A drop in your credit scores
A creditor can also reduce your credit limit if you’re getting close to maxing out the card, or if your credit report shows you’re having trouble with other debts. By doing so, they can prevent or deter you from making further purchases until you pay down your balance.
Should You Go over Your Credit Limit?
Experts recommend keeping your credit card balance under 30% of your total limit, and it’s also recommended that you never charge a purchase if you can’t pay off within 30 days. But sometimes life happens.
If you have to pay for a necessity and you truly have no other way to cover the expense (see suggested alternatives below), spending over the limit could help you get through your financial emergency.
Just make sure you consider all of the alternatives, and understand the penalties you’ll have to deal with after you make the purchase. On your next billing cycle, you’ll be expected to cover your minimum monthly payment, plus the over-limit amount and your over-limit fee.
How Does Going over Your Credit Limit Affect Your Credit Score?
Credit card balances are a big factor in determining your credit scores. As your balances increase, you’re likely to see a drop in your scores. That’s because your debt-to-credit ratio (DTC), also known as your credit utilization ratio or your “amounts owed,” makes up 30% of your credit scores.
Your DTC is calculated by comparing the amount you owe on a credit card to your available limit on the account. For example, if you owe $2,500 and the limit is $10,000, your DTC is 25%. While some experts recommend maintaining a specific DTC, the truth is that you can improve your credit scores by making any reduction in your balances.
On the flip side, you can expect to lose points when your balance increases, when your limit decreases and when an account is closed.
How Going over Your Credit Limit Impacts Interest Rates
Charging over the limit can have a negative impact on your credit card interest rate. When you spend over the limit, your creditor may increase the APR on the account and, if applicable, void your promotional interest rates.
If your credit scores drop as a result of over-limit spending, your rates could be impacted in other ways too. For example, the lower your credit scores are, the harder it will be to get low interest rates on new credit cards and car or home loans.
Alternatives if Your Credit Limit Is Low
If there’s any chance you might max out your credit card, take a serious look at your alternatives to using the card. Here are some ways you might be able to avoid going over the limit:
Credit Limit Increase
If your credit scores haven’t taken a big hit since you opened the account, you could request a limit increase from your creditor. Yes, you’ll still need to avoid spending up to the new limit, but a limit increase can give you some breathing room and even help improve your credit scores.
You can request a credit limit increase in a matter of just a few seconds by logging into your credit card account and answering a few questions. A word of caution here: If you call in a request for a limit increase, the agents at some creditors do a hard pull on your credit report and that hard pull can result in your credit score falling.
Balance Transfer Credit Card
Moving your debt around isn’t a permanent solution, but it can give you time to work on your situation.
One way to do that is by opening up a balance transfer credit card, or a credit card that’s designed specifically to pay off debt from another account.
Balance transfer credit cards often come with 0% introductory APR, meaning that you won’t have to pay interest on the balance you transfer for a set period of time, usually 12-18 months. The downsides are that you’ll likely be charged a flat fee of 3% or more on the amount you transfer, and you’re not likely to qualify for a balance transfer card unless you have good credit.
Taking out a personal loan to pay off credit card debt can be another elaborate way to move debt around, but it still has its benefits. Namely, personal loans tend to have far lower interest rates than credit cards.
In late 2022, the average APR for a personal loan was around 10%, while credit cards were at nearly 22%. To give you an idea of why it matters, consider this: if you owe $2,000 and pay $50 a month toward the debt, at 10% APR it would cost you $442 in interest charges to pay off the debt. Pay it off at 22% and that figure would go up to $1,637.
How to Avoid Going over Your Credit Limit
Managing credit requires a combination of good habits and financial stability. Whether your financial situation is rocky or not, here are some habits that can help you reduce credit card spending and keep balances low:
- Review your credit card statement and cancel recurring charges for goods/services you don’t use.
- Don’t allow retailers to save your credit card information to your online accounts.
- Leave your credit card at home and take cash or a debit card instead.
- Plan to pay off your full credit card balance monthly, or even weekly.
- Set a weekly credit card spending limit that fits your budget.
Speak to a Credit Counselor about Managing Your Debt
Another way to manage and overcome credit card debt is to work with a certified, nonprofit credit counselor. In addition to reviewing your finances and offering professional advice, a credit counselor can help you explore the possibility of reducing your credit card payments or fees by getting you onto a debt management plan.