There are plenty of reasons why you shouldn’t exceed your credit card limit, the first of which is the potential damage to your credit score. Just coming close to your credit limit makes you more of a risk and may cause your credit card company to increase your interest rate. On the other hand, not using the majority of the credit available to you is the smart way to attract lenders who will offer you low interest rates.
Consider the Negative Consequences
Exceeding your credit card limit can have several negative consequences. First, the card company may charge you a penalty for going over your limit. This charge is in addition to the interest you pay on the balance you owe. You will pay more interest, too, because the penalty will increase your balance; keeping a low credit balance reduces the amount of interest you pay.
If you overspend your account limit, your credit score may take a hit. Since 30 percent of your credit score is based on how much of your available credit you use, maxing out a credit card increases your credit utilization – or how much of your available credit you spend. Taking on too much debt can lower your credit score. The card company may decrease your line of credit or even close your credit account if exceeding your card limit becomes a habit.
Understand the Credit Score Impact
Although creditors don’t report over-the-limit fees or increased interest rates for exceeding your card limit to the credit bureaus, your credit report will still show that you have exceeded your credit limit. Maxing out a credit card increases the ratio of your outstanding debts in comparison to the amount of credit you have available.
Credit scoring systems give considerable weight to how much debt you owe when calculating your credit score. Both your credit limit and card balance show on your credit report. When you apply for new credit, a card provider or lender may consider you a high credit risk after reviewing your credit report and seeing you have maxed out a card. In such a case, the lender might charge you a higher rate of interest.
What to Do
If you go over your credit card limit, contact the card company right away. Ask if the provider is willing to waive the late fee, especially if this is the first time you have exceeded your limit.
Your next step should be to make your payment early to decrease the balance. Pay extra if you can to drop the balance below your credit limit. Not paying down the balance quickly means that the card company will continue to charge you an over-the-limit fee for each month that the balance continues to exceed your credit limit.
The good news is that paying down the balance will eventually improve your credit score as your debt-to-credit ratio decreases. In the meantime, financial willpower is key to managing your credit card debt.
Preventing It From Happening Again
Watch how much you spend by keeping a list of all the credit card purchases you make each month. Tracking your spending history can prevent you from exceeding your limit. Examine your monthly billing statements carefully so that you see exactly how much money you are spending.
The best way not to exceed your limit is to use your credit cards responsibly, keeping card balances below 10 percent of your credit limit. Bear in mind that a card company can raise your interest rate to 30 percent or higher if you default on the terms of your credit card agreement.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.