What happens if you go over your credit limit? Is it something so terrible that it has disastrous consequences? The answer is that going over your credit limit is never a good idea. It will have an immediate impact on your credit score and financial health. In this article, Hanfincal helps you look more closely.
1. What is a credit limit?
A credit limit is the maximum amount of money you can charge on your card or credit line before paying it back, including purchases, interest, and fees. The amount of each purchase is deducted from your credit limit as you use your card. And the amount you’re left with is referred to as your available credit.
You can charge to the credit limit and pay at least the minimum amount due, with any remaining balance being rolled over to the following month—with interest added.
Three primary factors determine the credit limit:
- Your financial situation: The issuer considers your income, existing debt, and other financial obligations.
- Your credit report and score are as follows: The credit limit on the card is heavily influenced by your credit history. If your credit score is bad, you may be perceived as higher credit risk, so the limit will likely be lower. If you have a good or higher credit score, the issuer will see you as less credit risk and may grant you a higher credit limit.
- Internal factors of the credit card issuer: The credit card company may extend lower or higher limits varying on how much money it is affordable to lend.
It’s critical to understand that your credit limit is not the same as your available balance. Most purchases and transactions, such as cash advances, will reduce the amount of available money. Any interest or fees you are charged will also be forfeited. However, none of this affects your credit limit.
What is a credit limit?
2. What happens if you go over your credit limit?
If you go over your credit limit, it will result in overdraft fees, higher interest rates, and higher minimum payments. On the other hand, what if you exceed your credit limit is determined by whether or not you opt-in for over-limit protection, a feature that allows you to spend more than your credit limit. Card issuers may consider many factors, including your previous payment history, when determining the risk of accepting an over-the-limit transaction.
The following are the specific consequences:
- Cards were declined. If this occurs, you are required to use an alternative payment method. On a case-by-case basis, some credit card companies will approve the transaction at no cost, but the cardholder must immediately pay back the overage.
- Fees. If you opt for over-limit protection, your card issuer can authorize transactions that exceed your limit, but fees apply.
- Interest rates have risen. If you exceed your limit too frequently, your issuer may increase your interest rate.
- Furthermore, your credit limit may be reduced, your credit score may suffer, and your credit account may be closed by your creditor.
3. Should you go over your credit limit?
Going over your credit limit is hardly a good idea. Even if you have over-limit protection, the disadvantages of exceeding your credit limit tend to outweigh its advantages.
You should avoid going over your credit card and spending close to your credit limit. The best practice is to keep your credit utilization rate as low as possible. Because exceeding your credit limit can result in higher interest rates and a lower credit score, try to avoid exceeding your credit limit unless necessary.
There are additional consequences for exceeding your credit card limit. Suppose you exceed your credit limit or repeatedly attempt to do so. In that case, your issuer may decide to reduce your credit limit, increase your monthly minimum payment, or charge a penalty APR.
Therefore, you should consider whether you want to opt-in and can spend more than your limit.
4. Does going over the credit limit affect credit score?
What happens if I go over my credit limit? Does it have an impact on my credit score? Yes, exceeding your credit limit has a high probability of lowering your credit score because your credit utilization ratio—your available credit to your existing debt—accounts for 30% of your credit score.
Given experts, to demonstrate that you’re using your credit line responsibly, keep your credit utilization ratio below 30%. Going over your credit limit, on the other hand, can increase your utilization and hurt your credit score.
If you do not pay off your credit card balance in full, the revolving balance will wreak havoc on your credit score, making it more challenging to open new lines of credit until your credit utilization improves.
5. How to avoid charging past your credit limit?
- Maintain a budget: Maintaining a budget can help you avoid exceeding your credit limit.
- Pay off existing credit card debt: If you have a balance on your credit cards, you should try to pay it off before making any new purchases with them and instead use cash for the time being.
- Check your credit balance more than once a month at the end of your billing cycle: It is ideal for checking your credit card balances at least once a week. If you notice one of them beginning to rise, you’ll need to be cautious with charging expenses until your billing cycle is over and you’ve paid some of your balance down.
- Request a higher credit limit: If you have a credit card in good standing, you can request a higher credit limit from your issuer. A credit line increase is a particularly appealing option if your income has increased since you first obtained your credit card or if you have a high credit score.
- Have money in the bank: Having a healthy emergency fund is another way to avoid going over your credit limit. You won’t be forced to charge unforeseen costs that can’t be charged to a credit card this way.
- Pay off your balance before the due date to avoid late fees: You can reduce your credit card balance by making payments throughout the billing cycle rather than waiting until the payment due date to send a single lump sum.
- Create credit card alerts: Set up text or email alerts for your card to monitor your credit limit if you opt in to over-limit protection.
- Follow your credit score: This score indicates how well you manage your debts, and keeping an eye on them is an excellent way to ensure that you’re on track.
- Apply for a credit card with a balance transfer option: A balance transfer credit card can assist you if you have difficulty paying off the balances on your current credit cards.
How to avoid charging past your credit limit?
6. Alternatives if your credit limit is low
If you have good credit, your credit limit increase request is more likely to be approved, so bear in mind to check your credit score before contacting your lender.
When requesting an increase in your credit limit, your lender will run a hard credit inquiry on your credit report. This may lower your credit score by a few points, but if your credit limit request is approved, your new credit should reduce your total credit utilization and boost your credit score.
Something as simple as updating your income with your credit card company could qualify you for an automatic credit limit increase.
Everything listed above is important to consider to answer the question: What happens if you go over your credit limit? Not only will the consequences affect your credit score, but they will also impact your current financial situation. Use the advice provided by Hanfincal to avoid exceeding your credit limit.
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