What happens when you go over your credit limit?
Over-limit fees are a relic of a bygone era, kind of
Focusing on credit scores and what consumers can do to improve them
Getting hit with a charge for going above your credit limit can be an unwelcome surprise – but it’s very rare and can’t happen without your permission.
The Credit CARD Act of 2009 prohibited a once-common practice of card issuers. It says a credit card issuer is prohibited from processing a charge above a cardholder’s limit unless the customer has consented to pay over-limit fees. If the cardholder has not opted-in to over-limit protection, the issuer must decline the transaction. Issuers are also barred from charging more than one over-limit fee per billing cycle and customers must be allowed to opt out at any time.
Prior to the CARD Act, credit card companies routinely allowed over-limit charges and would tack on fees – usually $35. The Consumer Financial Protection Bureau said in a December 2015 report the law effectively eliminated those fees, saving consumers $9 billion from 2011 to 2014.
Over-limit fees are all but extinct today – but there are some exceptions. While cardholders are automatically opted out of over-limit protection by default, mistakes can happen. About two years ago, Mike Gnitecki of Longview, Texas, inadvertently paid for a hotel stay with a card that had a smaller limit than others he owned.
“I reserved it online – it was one of those deals where you pay in advance,” he said. “I used the wrong card and wasn’t aware until I checked online and saw that the charge had appeared on that one.”
The transaction was processed, and the card issuer charged Gnitecki an over-limit fee. He called the hotel to have the charge refunded and the bill paid with a different, higher-limit card. After that, he contacted the issuer of the first card he paid with, and the over-limit fee was removed. Gnitecki said he was not previously aware of over-limit fees, and there was no explanation as to why he was charged.
Credit expert and attorney Stephen Lesavich said issuers who still offer over-limit protection typically opt you out of it by default when you sign up. Chances are you won’t notice this when you apply for a card.
“It’s buried in the credit card contracts that we never read,” Lesavich says.
What do credit card over-limit fees cost?
If you opt in, the issuer typically charges $25 for the first over-limit purchase and $35 for any additional over-limit charge within the next six months. The issuer may also raise your interest rate if you surpass your credit limit. Lesavich said over-limit protection is generally not a good option due to the fees and the potential to accrue high interest charges over time.
“You’re paying for something over a longer period of time and in a different set of circumstances,” he said. “A $50 overcharge may end up costing you $500 in the long run.”
Lesavich said over-limit protection is better suited to certain business purposes. For instance, a sales executive who regularly treats clients to dinner could turn on over-limit protection to avoid the embarrassment of a declined card transaction when picking up the check.
Consumers have other options to protect against breaching their credit limits. Lesavich said many merchants allow customers to spread charges over several different cards if a purchase price exceeds the credit limit on any one card. Additionally, many issuers offer mobile alerts that let you know when you’ve reached a high percentage of your credit limit. These notifications can also alert you to any potentially fraudulent charges.
If you’re in a pinch and need to spend more than what you have available, contact your issuer and ask for a limit increase. Most card companies will oblige if you explain the situation and your account is in good standing.
“If it’s an emergency and you’re a good customer ... the credit card company will increase your limit,” Lesavich says. “It could be temporary to cover a purchase, or permanent as long as it’s not some egregious amount.”
Accidentally going over-limit
Mistakes made out of your control can trigger over-limit fees.
- A merchant may overcharge you.
- An authorized user may unknowingly bust your balance through your credit ceiling.
Nevertheless, the responsibility of charging well within your credit limit lies with the primary cardholder. Going above your limit is never a good idea, unless it’s an emergency and you’re unable to call your issuer to request an increase.
Going over-limit hurts your credit score
Charging over your limit can also cause significant damage to your credit score. The amount of available credit you’re using on an individual card as well as across all your card accounts comprises 30 percent of FICO’s traditional credit scoring model. Exceeding 100 percent utilization on one single card will cause your credit score to drop even if you have other cards and they all have zero balances.
TransUnion Vice President Heather Battison said using too much of your available credit can also cause a ripple effect that damages your credit score in other ways.
“Someone spending to their credit card limit may be unable to pay their full balance on time,” she says. “The bottom line is it’s important for consumers to spend within their credit limit and manage their credit responsibly to avoid late payments and any negative credit score impact.”
Cardholders should always strive to keep their balances as low as possible. That’s the best way to offset any damage if a merchant or authorized user mistakenly busts your credit limit, if you’ve opted in to over-limit protection. It’s also a critical factor to achieve an excellent credit score and let prospective lenders know you’re a responsible borrower. And if your issuer has already opted you out of over-limit protection, it’s best to leave well enough alone..
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