By LOUIS DENICOLA
Your card's credit limit may not be as limiting as you think.
When you try to make a purchase that pushes your balance beyond your credit limit, there are several potential outcomes.
- The transaction may be declined. You might simply not be able to make the purchase with the card.
- The transaction may go through, but you could pay a fee. If you've opted in to allow over-the-limit transactions and fees, the transaction could go through, but if it does, you may be charged a fee. The fee can generally be up to $25 for the first occurrence, then $35 for subsequent occurrences during the following six months. However, the fee can't be greater than the amount spent over the credit limit. You can opt out of this option at any time, but the issuer doesn't need to refund past fees.
- The transaction may go through without a fee. Even if you haven't opted in, the issuer can allow the transaction to go through but then they generally can't charge you a fee. Some issuers or cards simply don't have over-limit fees, although the lack of a fee doesn't guarantee that the issuer will allow the transaction to go through. There are also cards that don't have a preset spending limit or over-limit fee and let cardholders spend more than their credit limit on a case-by-case basis at the lender's discretion.
There may also be several account-related consequences to spending more than your credit limit.
- The issuer may decrease your credit limit. If you repeatedly spend more than your credit limit, the issuer may decide to decrease the card's credit limit.
- Your required payment may increase. In addition to your minimum payment, you may need to pay the amount you spent over your limit.
The effects on your credit
Going over your credit limit can negatively affect your credit score because your utilization rate -- the percentage of available credit that you used -- is typically a major factor in your credit score.
If possible, try to keep your utilization rate below 20 to 30 percent. Maxing out your credit cards could hurt your credit, as a high utilization rate may indicate you're unable to afford the debt and are more likely to miss or be late with a payment in the future.
When your card doesn't have a spending limit
Charge cards, which often must be paid in full each month, usually don't have a credit limit or preset spending limit.
There are also credit cards, such as the SimplyCash® Plus Business Credit Card from American Express, that have a credit limit but don't have a preset spending limit -- sometimes referred to as "no preset spending limit" (NPSL) cards. In general, Visa Signature charge cards and World MasterCard cards are NPSL cards.
With such cards, you can spend more than your credit limit without paying a fee.
However, just because a card doesn't have a preset spending limit doesn't mean there's no limit to how much you can spend. Issuers may approve or deny any purchases above your credit limit depending on factors such as your credit score, payment history and income.
When the card has a credit limit and no preset spending limit, the credit limit could still be used to calculate the utilization rate.
For cards without a credit limit, such as charge cards, the issuer may report the highest previous balance as if it's your credit limit, and that could be used to calculate your utilization rate.
If the issuer doesn't report a credit limit, the card may be treated as an open credit line rather than a revolving account, and its utilization rate won't be factored into your score.
Credit-scoring models may also consider whether a card has a preset limit when calculating the impact of going over your credit limit. Going over your limit with an NPSL card may not negatively impact your credit score as much as going over, or reaching, the limit with a non-NPSL card.
If you can pay the bill in full
While some people may want to avoid maxing out their credit cards because they'll find it hard to pay off the debt, what if you go over your limit and can pay the bill in full? Perhaps your card has a low limit but you want to use it for every purchase to earn rewards.
You won't pay interest if you can pay off the card before the due date, and you may not have to pay a fee, but the high utilization rate could still negatively affect your credit.
You may be able to avoid this by paying down the balance before the card's issuer reports the card's balance to the credit bureaus.
According to Troy Dennis, head of credit card product management and acquisition at TD Bank, "Typically, the issuers report to the bureaus every month, but the time of the month depends on the issuer." He says there's no harm in making a payment before the balance is due.
Or, if the high spending is a one-off occurrence, you could also consider letting the issuer report your high utilization. Your credit score may temporarily drop as a result, but that may not be a concern if you're not actively looking or applying for a new credit line or loan. When the issuer reports a low utilization rate the next month, your score may recover.
If you find yourself approaching, or surpassing, your credit limit each month and can make payments in full, you may want to ask for an increase in your credit limit or apply for a new credit card and spread out the purchases.
While requesting a credit limit increase or applying for a new card could result in a hard inquiry, which may temporarily lower your credit score, it could still be worth it, as the score increase from lowering your utilization rate may more than offset the effect of the hard inquiry.
Going over your credit limit could result in an over-limit fee, if you've opted in to permit the card issuer to allow charges that put you over your credit limit, or lead to a declined purchase.
However, there are some cards that don't have an over-limit fee, preset spending limit or credit limit at all. Your purchase may go through, but if your overall balance breaches the reported credit limit, the high utilization rate could hurt your credit.
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