Understanding the Impact of Exceeding Your Credit Limit

At O1ne Mortgage, we prioritize consumer credit and finance education to help you make the best financial decisions. Exceeding your credit card’s borrowing limit can have significant consequences on your credit score and finances. In this blog, we will explore how going over your credit limit affects your credit score, what happens when you exceed your limit, and how to avoid and manage this situation.

Does Going Over Your Credit Limit Affect Your Credit Score?

Exceeding your credit limit can negatively impact your credit score. Your credit utilization rate, which is the percentage of your credit limit that you are using, plays a crucial role in determining your credit score. When your credit utilization rate exceeds 30%, it can start to have a more pronounced negative effect on your score. Ideally, you should aim to keep your credit utilization below 10% to maintain a healthy credit score.

If you go over your credit limit, your utilization rate will exceed 100%, which can significantly lower your credit score. The extent of the impact depends on your utilization rate before exceeding the limit. If your utilization was low, the drop in your score will be more noticeable. Conversely, if your utilization was already high, the additional impact may be less severe.

What Happens When You Go Over Your Credit Limit?

When you attempt to make a purchase that exceeds your credit card’s borrowing limit, several outcomes are possible:

Payment Declined

If you have not opted into overdraft protection, your payment will be declined, and you will not be charged any fees. Even if you have opted into overdraft protection, the payment may still be declined depending on the card issuer’s policies and the amount by which you exceed your limit.

Overdraft Fee

If you have authorized overdrafts and the transaction is approved, you will be charged an overdraft fee. The fee can be up to $25 for the first time you exceed your limit and up to $35 for subsequent instances within six months. However, the fee cannot exceed the amount by which you went over your limit.

How to Avoid Going Over Your Credit Limit

Preventing overdrafts is the best way to avoid the negative consequences of exceeding your credit limit. Here are some strategies to help you stay within your limit:

Opt-Out of Overdraft Protection

When applying for a credit card or responding to notifications about overdraft options, choose not to approve overdrafts. If you have already opted in, you can change this setting through your bank’s website, app, or by calling customer service.

Set Up Alerts

Set up alerts for each credit card to notify you when you are approaching your borrowing limit. This can help you manage your spending and avoid accidental overdrafts.

Keep a High-Limit Card for Emergencies

Consider keeping a credit card with a high limit and overdraft protection for emergency use only. To prevent the card from being closed due to inactivity, use it for a small recurring expense and set up autopay to cover it.

What to Do if You Go Over Your Credit Limit

If you find yourself in a situation where you have exceeded your credit limit, take the following steps to mitigate the damage:

Make a Payment Immediately

Bring your balance below the credit limit as soon as possible to avoid additional overdraft fees and further damage to your credit score.

Request a Higher Credit Limit

If you have a decent credit score and have been managing your accounts well, consider asking for a higher credit limit. This can help you avoid future overdrafts, but you should still focus on reducing your balance.

Stop Using the Card

Put the maxed-out card aside and stop using it for new transactions. Pause any recurring expenses assigned to the card and ensure they are covered by other means.

Focus on Paying Down the Balance

Concentrate on making payments to reduce the balance on the maxed-out card to below 30% of the borrowing limit. Continue to make payments on other accounts to avoid elevated balances.

Consider Debt Consolidation

If your credit scores are still in good shape, consider a debt consolidation loan or a balance transfer credit card. These options can help reduce interest charges and make it easier to pay down your debt.

Seek Credit Counseling

If you have multiple cards with high balances, consider getting advice from a certified nonprofit credit counseling agency. They can help you devise a plan to manage your debt and improve your credit.

The Bottom Line

Exceeding your credit card’s borrowing limit can lead to costly fees and a lower credit score. To avoid this, choose not to allow card overdrafts and aim to keep your credit utilization below 30%. If you do exceed your limit, take immediate action to reduce your balance and seek professional advice if needed.

At O1ne Mortgage, we are here to help you with all your mortgage service needs. Call us at 213-732-3074 to speak with one of our experienced loan salespersons and get the assistance you need to make informed financial decisions.