Your credit limit is set by your card issuer and determines how much you can buy on credit each month. Ideally, you’ll stay well below that number, but if you’re nearing that ceiling, you might start wondering what will happen if you go over your credit limit.
With the passage of the Credit Card Act of 2009, creditors are no longer allowed to automatically charge you overdraft fees for spending over your allotted limit. In most cases, if you overspend, your card will simply be declined. If you want to avoid having your card declined, you can opt for overdraft protection, although there are some downsides to doing so.
How Overdraft Protection Works
If you choose overdraft protection and then go over your credit limit, the transaction will continue, but your card issuer will charge you an overlimit fee – usually around $25 for the first violation. If you exceed your credit limit a second time within six months of the first, you will be charged a $35 overlimit fee. The exception is if you’ve only exceeded the limit by a few dollars: creditors are not allowed to charge you an overlimit fee greater than the amount by which you exceeded your limit.
For most people, overdraft protection isn’t necessary and it could cost you a lot more than $35 if you end up having a balance. If you spend so much that you can’t pay it back at the end of the month, you will be charged interest. Depending on the card and your credit score, interest rates can vary from 13% to 25%. If your card’s interest rate is 20%, for example, and it takes you six months to pay off what you owe, that $35 fee will now cost you $42. And the more you owe, the worse the effect.
Your credit score will also be negatively affected. Using most or all of your available credit indicates that you may be living beyond your means. It is not uncommon for those who spend 75% or more of their monthly credit allowance to see their scores drop by 50 points or more. This can make it difficult to get loans or new credit cards in the future.
How to avoid going over your credit limit
The most important step you can take to avoid going over your credit limit is to regularly monitor your credit usage. If you know you’re nearing your limit, there are things you can do. The easiest option is to spend with cash or debit card. If this is not possible, you can try to reduce your expenses for the rest of the month. You can also pay your credit card bill in the middle of the month and again at the end of the month to free yourself up to spend more.
If you regularly run into your credit limit, it might be time to ask for a credit limit increase. Credit limits are determined by your credit score and income, so if one or both of these numbers are low, you may not be approved. You can request a credit limit increase on your card issuer’s website or by phone. You may be asked to provide updated income information to help the company make its decision.
It’s important to understand what your credit limit is and take steps to stay within it. Be aware of how much you charge your credit card and make sure you can pay the balance in full each month. If you do this, you won’t have to worry about overlimit fees or your card being declined.