Are you tempted to put a big purchase on your credit card? Think twice because if you go over your credit limit there will be consequences.
You may be in for a rude awakening the first time you exceed your credit limit because the first thing that takes a hit is your credit score.
Just because you receive a credit limit doesn’t mean you can use the entire line of credit up without a knock-on effect.
In fact, credit utilization or the amount of credit you use compared to your limit each month is a factor that contributes to your creditworthiness.
An individual with a 730 credit score could easily see 90 → 100 points knocked off their score in one period simply by maxing out their credit limit by making an unusually large purchase.
And that doesn’t hit doesn’t even take into account the impact of going past your threshold. So you might be wondering what happens if you go over your credit limit?
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What Is My Credit Limit?
Your credit limit is the maximum line of credit offered to you be a lender or credit card company.
A good rule of thumb is that you should only use 30% of your credit limit in any given period in order to avoid negative hits to your credit score.
So, if you were issued a credit card with a $5,000 limit, a 30% credit utilization would amount to $1,500.
By spending $4,900, or 98% of the credit limit, a credit card issuer may conclude that you are struggling financially.
And as Murphy’s Law predicts, when it rains it pours. Just when you are falling behind in payments, credit bureaus take a less rosy view of your creditworthiness, which in turn hurts your credit score.
During those gloomy periods when it may not be possible to pay off your credit card balance in full each month, try to make minimum payments at the very least to limit the damage.
How Do I Check My Credit Limit?
If you are not sure how much credit has been extended to you be a lender, check your monthly statement or visit the online portal of the credit card issuer.
It is important to pay close attention to this number because the rates you are offered by lenders are influenced by your credit score.
And while it may not seem like a big deal to pay an extra 1% → 2% in interest charges each year, the additional costs over a 10, 20, or 30 year period can amount to tens of thousands of dollars or more in needless interest payments.
What Happens If I Go Over My Credit Limit?
You can probably already guess that if you are penalized for simply spending up to your credit limit, the consequences can be even more severe when you go over your limit.
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Although overcharge fees may be assessed, your credit limit may be reduced, higher interest rate charges may be applied, and your credit score may be impacted, a silver lining does exist.
Can You Go Over Your Credit Card Limit?
Here is the good news, sort of!
Credit card companies are required by law to provide you the option to have transactions declined when you spend beyond your limit.