An arrangement covering you for over-the-limit transactions is not a get-out-of-jail-free card, and there could be consequences.
What happens if you end up spending more than the credit limit you have available on any of your cards?
The Credit CARD Act of 2009 provided consumer protections that weren’t available prior to the legislation, including for over-the-limit transactions. And the Consumer Financial Protection Bureau has spelled out what requirements are to be met for a card issuer to OK your over-limit transaction and charge you for it.
You will have to opt in
The default position is that you cannot go over your credit limit, and a card issuer will have to give you the chance to opt in to go over your credit limit.
You do not opt in merely by applying for a credit card. When you apply for the card, the issuer could provide a notice that allows you to go with the over-the-limit arrangement. The opt-in should be a separate provision not tied to other features of a credit card application.
An issuer could also send you a separate form, with your monthly statement or other communication, to opt in to over-the-limit transactions. You could also call the issuer or email it to affirm your consent.
Further, the card issuer will have to confirm that you have opted into this feature before activating it on your account. The law prohibits a card issuer from tying a higher credit limit offer to your opting into the over-the-limit protection. The issuer also cannot require you to opt in as a condition of approving your application for credit.
What’s the fee for going over your credit limit?
If you go over your credit limit after opting in, the CARD Act set a $25 limit as a reasonable amount for a first violation, and a $35 cap for any subsequent defaults within a six-month time frame.
After adjusting for inflation, those penalty fees are capped at $29 and $40 for 2020. In any event, the fine cannot exceed the amount you went over your limit by. Also, while an issuer can charge you an over-the-limit fee, it can’t impose a recurring periodic fee just for allowing you to opt into this feature.
What if a recurring or interest charge puts you over your limit?
In certain circumstances, a card issuer might have to OK a transaction that pushes you over your credit limit, even if you haven’t expressly opted in.
For instance, you make a $20 purchase and before this is charged to your account a different recurring charge is posted. When the $20 is subsequently charged, it makes you go over your credit limit. In these situations, the issuer cannot charge you a penalty for crossing your credit limit.
Another case in point is if interest charges for a billing cycle push you over the credit limit. The issuer cannot charge you a penalty for that, either.
Additionally, it’s left to the discretion of a card issuer whether to approve an over-the-limit transaction, even if you have opted into the arrangement. An issuer could also refuse to continue to honor your opt-in request in case it sees you as a credit risk at some point.
You have the option to back out of the over-the-limit arrangement if you choose to do so. In this case, you are still liable for fines on transactions that put you over your credit threshold before you opted out.
The law doesn’t allow an authorized user on a card – who does not share joint responsibility with the cardholder on the account – to opt into the over-the-limit protection or withdraw from the feature.
Going over your credit limit can hurt your credit score
If you go over your credit limit, that begs the question of how well are you managing your available credit. Opting for this arrangement is not a get-out-of-jail-free card, and there are consequences for going over your credit limit.
For one, the amount of your available credit you use factors into your credit score as a credit utilization input. If you max out your card, that could lower your credit score by more than 120 points, according to FICO. You could also see your interest rates go up if lenders see you as a higher credit risk after your over-the-limit spending is reflected in your credit report.
If your income has risen and you can justify the additional spending, you could ask your issuer for a higher credit limit.
Otherwise, you should aim to be responsible with your spending and not see going over your credit limit as a choice.