Credit cards are a lifesaver when cash isn’t an option for making payments. Many Americans have multiple credit cards that earn rewards or offer a low APR to finance larger purchases. But what happens if you lose track of your spending and go over your card’s credit limit? Here is what to expect if you exceed your credit limit.
Can You Go Over Your Credit Limit?
First things first: can you exceed your credit limit? Yes and no. In most cases, you cannot go over your credit limit – after all, that’s why it’s called a limit. Because of these limits to credit lines, if you go over with a purchase, your credit card will likely be declined.
In some cases, you can go over your credit limit, but your bank will assess an over-the-limit fee. These fees apply to charges that exceed the credit limit, and cardholders must opt-in.
Over-the-limit fees are part of an agreement between the bank and the account holder when a credit card account opens. The bank must provide a notice allowing you to select overage fees if you go over the limit. Choosing this additional protection is not a requirement for the approval of a credit card application, though.
It’s worth noting that even if you choose to add an over-the-limit protection plan to your card account, your bank must approve all purchases. This means your bank might still decline charges – even if you have over-the-limit coverage.
How Much Are Over-the-Limit Fees?
As of 2020, the CARD Act states your bank can charge up to $29 for your first over-the-limit penalty, and up to $40 for all subsequent charges during the next six months.
Interest Charges Causing You to Go Over Your Credit Limit
Besides purchases, there are other reasons you might exceed your card’s credit limit. If you purchase at the same time an interest charge is added to your account, the purchase may push you over your limit. In instances like these, your bank may approve the purchase – even if you don’t have over-the-limit coverage. If you pass your credit limit due to interest charges, you won’t have to worry about penalty fees. However, you will still have to contend with the interest charge.
Why You Should Never Max Out Your Credit Card
Just because you can go over your credit limit doesn’t mean you should. Maxing out your credit cards can be disastrous for your credit score – and your finances overall.
According to FICO, the credit scoring system more than 90% of lenders use, maxing out your credit cards could drop your credit score by as much as 120 points. And, because credit utilization accounts for 30% of your FICO Score, the damage to your credit can take years to repair.
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