Credit Cards 101: Here’s What Happens if You Go Over Your Credit Limit
A common question for credit cardholders is, “What happens if I go over my credit limit?” Read on to learn about this important aspect of using a credit card.
Author: Arro Team
December 2, 2022|Blog
In order to talk about going over your credit limit, let’s start off by defining what it is. A credit limit is the maximum amount of money your card issuer will let you spend. Credit limits vary from person to person and card to card because the lender reviews your credit report to determine the amount of your credit line. Your limit is supposed to help prevent you from taking on more debt than you can afford.
If you’ve ever been close to your credit card limit and had an unexpected expense come up, maybe you wondered what happens if you go over your credit limit. That’s a good question. In this blog post, we’ll explain what happens when you go over your credit card limit, as well as some tips on what to do if you exceed it and how to avoid it in the future.
Can You Exceed Your Credit Card Limit?
Yes and no. Not all credit card companies allow the option of intentionally going over your limit. The ones that do and charge a fee for it must abide by the CARD Act regulations and require you, as the cardholder, to opt into their over-limit protection before letting you exceed your limit.
To add some confusion to the mix, it’s also possible to exceed your limit indirectly, even if you didn’t opt in.
How can that happen? Pre-authorizations and holds are the culprits.
When you use your card, a dollar amount is charged (pre-authorized) against your available balance (ever seen that italicized pending transaction on your online account?). That amount is temporarily placed on hold for anywhere from a few minutes to a few days. In most cases, the hold is removed when your purchase clears your account. However, holds may fall off (expire) beforehand, resulting in the purchase amount being added back into your available balance.
Think of it like writing a check (you know, those pieces of paper the person in front of you at the grocery checkout line takes like 20 minutes to fill out?). Until the merchant cashes your check, the money you’ve spent will still show in your available balance.
Now, let’s take a look at the ways you can go over your limit:
You Opted Into Over-Limit Transactions
This one’s pretty cut-and-dried — you can use your card to make purchases that push you over your limit. Basically, you consented to paying a fee for exceeding your limit by enrolling in your card issuer's over-the-limit coverage.
By opting in, you're telling the credit card company that you're okay with them approving transactions and letting you continue using your card, even if you don't have the available balance to do so.
Here's what that might look like: Suppose you only have $5 left to spend on your card but need to replace a blown-out tire. Because you opted in, your $100 new tire purchase can be approved, “protecting” you from being stranded. Keep in mind your credit card issuer isn’t obligated to approve purchases over your limit, even if you opt in.
The Hold Amount Was Less Than the Actual Charge
Holds (pre-authorizations) don’t always match the final amount of the charge, making your available balance artificially higher. For example, some gas stations only hold $1 when you pump gas. If you pump $50 worth of gas, but only $1 is placed on hold, you can unintentionally exceed your limit if you make additional purchases before the gas charge clears your account. It’s illegal for credit card companies to charge you an overlimit fee — even if you opt into overlimit coverage — if this happens.
You Were Charged Interest or Fees
If you don’t pay your credit card bill in full each month and carry a balance instead, you’ll be charged interest. If your balance is already close to the limit, that finance charge can push you over the top. The same goes for things like foreign transaction fees or late payment fees.
You Added a Tip
Adding a tip to your bill instead of using cash can throw your available balance off. That’s because tips aren’t included in the pre-authorization that’s placed on your card. The hold will be for the meal or service, and the tip will show in the final amount that clears your account.
What Happens if You Go Over Your Credit Limit?
When you go over your limit, the outcome will depend on whether or not you’ve opted into over-limit protection.
If you do opt in, you’re subject to a fee for exceeding your limit if your transaction is approved. However, even if you’ve opted in, it doesn’t guarantee that your over-limit purchase will be approved. This is because your credit card issuer might have specific guidelines for the service, such as a maximum dollar amount or payment history.
If you don't opt into over-limit protection, it can get a little complicated. Here's why: If you try to actively use your card for purchases that would exceed your limit, your card will likely be declined. But, any previously approved charges will get paid when they come through, even if they push you over your limit.
Okay, here's an example: You have $50 left on your card and pump $45 in gas. But, the gas station only holds $1 (held or pre-authorized amounts vary by merchants), making it look like you have more available than you do. Because you're not watching your balance, you stop at the grocery store that evening and buy $45 worth of groceries. Two days later, your $45 gas purchase hits your account. The credit card company has to pay it because it was approved at the time of your purchase.
The difference between the two opt-in situations above is that, in one case, you can directly use your card to spend more than you have available. In the other case, you can't purposely spend more, but, due to the timing and dollar amounts of holds (pre-authorizations), previously approved charges can clear your account.
Instead of overspending and incurring over-limit fees, look for alternative ways to make purchases and adjust your spending behavior to avoid the risk of exceeding your limit. As we’ll discuss below, opting into over-limit protection can negatively impact your finances.
What Are the Consequences for Exceeding Your Credit Card Limit?
While it might be tempting to max out your credit card, especially in a financial pinch, it’s important to know what you’re getting into. Having your card denied for exceeding your limit can be embarrassing if you’re in a public place, but there can be repercussions beyond that.
Your Card Could Be Declined
As mentioned above, even if you’ve opted-in to exceed your limit, the card issuer doesn’t have to approve those transactions. Aside from the awkward moment when you’re denied while trying to grab a cup of coffee, you could be put in a difficult situation if you’re counting on the charge being approved and you have no other way to pay.
You’ll Be Charged Over-Limit Fees
Not all card issuers penalize their cardholders with over-limit fees, but some do. If you’re already in a financial bind, fees make it harder to pay down your balance. Over-limit fees are charged each billing cycle that you’ve exceeded your credit line. Card issuers can only charge a fee if you’ve opted into their over-limit protection.
Your Interest Rate Can Go Up (Penalty APR)
In your credit card agreement (which you thoroughly read, right?), any penalties for violating the issuer’s terms will be listed, including fees and interest rate adjustments. Penalty APRs (annual percentage rate) can be crazy-high — hovering around 30%. Carrying a balance with a rate like that makes it harder to pay off because more of your payment goes toward interest.
If your card issuer raises your rate, the penalty APR only applies to new purchases, not to your existing balance. Be careful with any new spending once you pay down your balance.
Your Minimum Payment Will Increase
On top of your normal minimum payment, you’ll also have to pay the total amount over your limit. For example, if you exceed your credit line by $150, you’ll have to pay your standard minimum paymentplus $150, as well as a potential fee, on your next billing cycle. Ouch.
It Can Be Harder to Get Approved for Future Loans
If you're maxed out on your credit cards, lenders will see that you're overextended on your revolving accounts when they review your credit report. They may think you're struggling to manage your finances and are more likely to default on payments, which can lead to being denied for new credit cards and future loans.
By choosing to opt out of over-limit protection, you're clearly avoiding a long list of negative financial consequences, not to mention frustration. Opting out is a wise personal finance decision.
Your Credit Limit Could Decrease
Your credit card company may lower your credit line to reduce its risk. Although this most likely won’t happen after one occurrence, they might reduce your credit limit to prevent you from spending more and getting deeper into credit card debt.
Your Credit Card Account Can Be Closed
Your card issuer might temporarily freeze or permanently close your card. If they do close your credit card because of violating their terms, it’ll reduce the length of your credit history, which is a factor taken into consideration when calculating your credit score.
How Does Going Over the Limit Impact Your Credit Score?
Your credit card activity and balances are reported to all major credit bureaus. Exceeding your card limit is unhealthy for your credit and will definitely lower your score. Here’s why:
It Raises Your Credit Utilization Ratio
Going over your credit limit hurts your credit score because it raises your credit utilization ratio on revolving accounts. Simply put, you’re using a higher percentage of your available credit. Try keeping your revolving balances under 30% of your available credit to prevent your score from being penalized.
It Can Cause You to Default on Your Payments
Exceeding your limit directly impacts your required payment amount. You still owe your regular minimum payment, but you also have to pay the total amount over your limit on your next bill.
Depending on how much you overspent, that can make your payment too high for you to handle, causing you to miss payments. It’s like getting stuck in a Groundhog Day loop — minus Punxsutawney Phil. Missed payments also have a significant impact on your credit score.
Tips to Avoid Exceeding Your Limit
Of course, the best thing to do is to avoid going over your credit card limit in the first place by being proactive with your finances. Here are some tips to keep you from overextending your credit:
Opt out of over-limit protection. You’ll avoid over-the-limit fees, damage to your credit score, and the temptation to overspend.
Know what your credit limit is. Before using your card, make sure you know what the limit is to avoid maxing it out.
Set up balance notifications. When your balance reaches a set amount (that you choose), you’ll receive a text message or email. Knowing how much you owe on your card compared to your limit can help curb your spending and prevent you from maxing out your card.
Build an emergency fund in addition to your card. Your credit card isn’t your emergency fund. Set money aside for unexpected expenses instead of maxing out your card.
Set a personal spending limit each month. Don’t spend with wild abandon or use your card for unlimited retail therapy (we know it’s tempting!). Avoid approaching your credit limit because using too much can hurt your credit score.
Adjust your spending habits. Be intentional with your spending and learn the ins and outs of how your credit card works.
Exceeding Your Credit Card Limit FAQs
Let’s address some common questions cardholders have about what could happen if they exceed their credit limit.
What Should You Do if You Go Over Your Limit?
Take care of it as soon as possible. Here’s what you can do:
Pay down your balance as fast as you can to lessen the time you're over your limit.
Ask your credit card company for a credit limit increase.
Ask your card issuer for a payment plan if you’ve gone over by a large amount. Remember, you’ll owe the total amount over your limit plus your minimum payment and a potential over-the-limit fee.
How Much Can You Spend Over Your Limit?
There's no surefire way to know exactly how much you can spend above your limit if you opted into over-limit protection. That’s up to the card issuer, who may consider a variety of factors when approving an over-the-limit transaction.
What if You Accidentally Exceed Your Card Limit?
It depends. If you’ve opted into the over-limit protection, you’ll probably be charged a fee. Ask your credit card issuer if they can waive the over-limit fee; every little bit helps. If you haven’t opted in but exceeded your limit, you won’t be charged a fee.
Should You Exceed Your Limit?
Now that you know what happens when you go over your limit, you might be wondering: Should you go over it? Like many things in life, just because you can, it doesn't mean you should. Opting out of the ability to go over your credit limit is in your best interest.
The consequences of exceeding your credit limit are too significant to ignore. Maxing out your card can increase your interest rate, lower your credit score, and cause you to incur over-the-limit fees, so don’t do it unless it’s an emergency.
It’s Best Practice to Stay Within Your Credit Limit
Although it can be convenient to exceed your limit when making purchases, it has clear negative consequences. It’s best practice to stay within your credit limit to avoid costly over-limit charges, higher interest rates, and damage to your credit score.
Knowledge is power, and at Arro, we share information to help you build positive financial habits. With the Arro Card you have control over growing your credit limit through in-app personal finance activities, so you have the credit you need, when you need it, and always at a fair rate.