What happens when you go over your Credit Card Limit?

A "credit limit" is the maximum amount of money you can borrow using your credit card. Each time you use your card for a purchase, the amount is subtracted from your available credit. If you continue making purchases without paying off the balance, you may eventually exceed this limit. This is what’s commonly referred to as going "over" your credit limit.

For example, if your credit card has a limit of INR 10,000 and you spend INR 1,500, your remaining credit is INR 8,500. If you then spend more than INR 8,500, you surpass your credit limit. This then could lead to fees and a negative impact on your credit score.So, what exactly happens when you go over your credit card limit? Let’s break it down.

Declined Transactions

One of the first things you’ll notice when you exceed your credit card limit is transactions getting declined. Here’s a scenario: you’re standing at the checkout line at a store, ready to make a purchase, only to have your card rejected. It’s a frustrating and potentially embarrassing experience.

When you hit your credit card limit, your card issuer might also block further transactions to prevent you from going even deeper into debt. This safeguard is meant to protect both you and the issuer, but it can be inconvenient if you are relying on your card for essential purchases.

Penalties

Going over the credit card limit can also result in hefty penalties. Many issuers charge an over-limit fee, an additional cost you incur for exceeding your credit line. The fee can range from Rs. 500 to Rs. 1,000. What’s more, this fee might be charged every month that your balance remains over the limit.

The penalties don’t stop there either! Some issuers might also increase your interest rate as a result of going over your limit. This turns what was once a manageable balance into a costly debt. This penalty interest rate(sometimes referred to as the default APR) can be significantly higher than your regular rate. It’s a way for the issuer to mitigate the risk they see in lending you more than you were initially approved for.

Credit Score Impact – A Drop in Numbers

Exceeding your credit card limit can have a negative impact on your credit score in several ways. First, your credit utilization ratio – the amount of credit you are using compared to your total available credit will spike. A high credit utilization ratio signals to lenders that you may be overextended and struggle to pay your debts.

Credit scoring models, like those from CIBIL or Experian view high credit utilization as a risk factor and your score may drop as a result. This dip in your score can make it harder to secure favourable terms on future loans. You may not even get approved for new credit cards. In some cases, your over-limit status may get reported to credit bureaus and further damage your score.

Worst Case Scenario –Account Freeze or Closure

If you consistently go over your limit or if you’re unable to bring your balance back under control, your issuer might decide that you are too risky to lend to. They could freeze your account. This means you will not be able to make any new purchases until you’ve paid down your balance. Worse, they might close your account entirely. This wouldn’t just leave you without the credit line but could also harm your credit score further.

How to Recover – Paying down your Balance

If you’ve gone over your credit limit, the first thing you should do is prioritize paying down your balance. The goal here is twofold:

• Open up more room on your credit line
• Lower your overall credit usage

By paying off a substantial portion of your balance, you can reduce the impact on your credit score and avoid additional fees.

Start by reviewing your budget to see where you can cut back on spending. Redirect those funds toward your credit card payments. If possible, make more than the minimum payment each month. Doing so will help you pay down your balance faster and reduce the amount of interest you’ll pay over time.

Exploring Alternatives

If your credit card debt is becoming unmanageable, consider transferring your balance to a card with a lower interest rate. Balance transfer cards typically offer a low or 0% introductory interest rate for a certain period. What this does is gives you some breathing room to pay off your debt without accumulating additional interest.

However, balance transfers aren’t free. Most cards charge a fee of 3% to 5% of the amount transferred. Still, if you’re carrying a high-interest balance, the savings from the lower interest rate can outweigh the transfer fee. Just be sure to read the fine print and understand when the introductory rate will expire.

Prevention Is Better Than Cure: Tips for Avoiding Over-Limit Fees

To avoid the stress and financial strain of exceeding your credit limit, it’s essential to monitor your spending closely. Keep track of your purchases and know how much credit you have available at all times. Many credit card issuers offer tools, such as mobile apps or online portals. They allow you to check your balance in real time.

Setting up account alerts can also be helpful. You can receive notifications when you’re approaching your limit. Finally, consider opting out of over-limit protection if your card issuer offers this service. While this protection allows transactions to go through even when you’re over your limit, it also means you’ll be charged fees. For example, SBI Credit Card has a 2.5% or INR 600 (whichever is higher) over-limit fees. Opting out can help you avoid these charges because transactions will simply be declined instead.

Final Thoughts

Credit cards are great for managing your finances and building credit, but they come with the responsibility of mindful usage. Keeping your spending well below your credit limit is significant to avoiding over-limit fees and protecting your credit score. By staying aware of your credit limit and maintaining a low balance, you can better manage your finances and avoid potential drawbacks. Always aim to make your payments on time and in full to be clear of debt.

: Hitch Zone is a cutting-edge financial technology company revolutionizing the way individuals and businesses manage their finances.