It is not uncommon for credit cardholders to be charged for going over their credit limits. And it generally only occurs with your consent. If you are find yourself in such a situation, there are only two possible outcomes. Either you incur a late fee or you end up hurting your credit score.
Opting Out of Over the Limit Charges
When a credit card is issued, you might be given an option to opt for over the limit transactions. If your bank provides this facility, you can opt in or out of this option anytime you want.
In case you have this option enabled, purchases exceeding your limit usually go through. The allowed overdraft amount and the levied fees are decided by your bank.
On the contrary, if you have opted out of this, any transaction that exceeds your limit would be automatically declined. This saves you from any unwarranted charges on the card.
Impact of Going Over Your Credit Limit
Apart from the applicable charges, surpassing your credit card limit can have two more consequences:
- Increased Debt-to-Limit Ratio: The Debt-to-Limit Ratio represents the consumer’s total credit card debt versus total credit card limits. In other words, it represents the amount of debt that is available for your usage. Going over the card limit effectively translates to a ratio of more than 1 (or 100%), which can be bad for your credit profile in the long run.
- Implications on Credit Reports: It is rare for credit ratings to be impacted due to single over-the-limit instances. But multiple instances like these are will have a detrimental effect on the ratings.
- Future Credit Prospects: Multiple lenders can access your report and review it with soft credit checks from time to time. With a low credit score, future prospects of credit increases or new credit card issuance can be impacted.
How to Avoid Going Over the Credit Limit
Regardless of whether your card allows over-the-limit transactions, it is always better to avoid such transactions altogether. But if an urgent need (or impulse) does arise, here are the best alternatives to handle the situation:
- Splitting the Bill: If you have to make a transaction that crosses your credit card limit, consider splitting them across multiple credit cards (if you have them) instead of going over the limit on a single credit card.
- Charge Cards: These are similar to credit cards in the sense that you can them pay back to the bank at a later stage. But the differing factor is that instead of converting the spend into an EMI option, you need to pay back the entire amount in a stipulated time frame. Although no interest rate is charged, penalties are levied in the case of late payments.
- Increasing the Limit: If you find yourself on the wrong end of the credit card limit time and again, you should reassess your usage and lodge a credit increase request with your bank.
Using the Card Responsibly
With the responsible usage of credit cards by considering them as instruments of emergency management, you can avoid instances where you cross your limits. And even when you do need more credit, card providers are much more likely to accept your requests.