A “credit limit” refers to the amount of money a cardholder can borrow in a credit card transaction. Every transaction you make with a credit card adds to your account balance and reduces your available credit. Making purchases over this maximum amount before paying off the balance is often referred to as “exceeding” your credit limit.
If your account has a credit limit of INR 5,000 and you make a purchase of INR 250, the remaining credit available is INR 4,750. If you then make additional purchases over INR 4,750, you will exceed your credit limit, which could incur charges and hurt your credit score.
Can you exceed your credit limit?
Yes. It is possible to exceed your credit limit. The amount your issuer will allow you to borrow beyond your limit is usually unknown. Factors a card issuer evaluates to determine any buffer beyond your limit may include your past payment history and any bank balances you maintain in checking and savings accounts with your issuer. The issuer can charge an overlimit fee only if the cardholder has subscribed to an overlimit protection scheme, otherwise the card user cannot make payment over the limit .
The credit limit itself also depends on three separate factors:
- Financial situation: Card issuers look at your debt, income, and other obligations when choosing an appropriate credit limit. This is all the information that you may be asked to provide when subscribing to a card. If it is clear that money is available to easily cover a higher bill, card issuers may sometimes increase a limit.
- Credit score: Credit history is also considered when evaluating a card’s credit limit. Upon request, the issuer will pull your report from a major credit bureau such as Equifax, Experian or Transunion CIBIL. Low risk applicants will generally be rewarded for higher credit scores with a higher credit limit.
- Other factors: The financial situation of the lender as well as general economic conditions can affect your individual credit limit. Some cards are designed with certain parameters dictating credit limits; the co-branding of a card and the terms of its issuer may impose a maximum limit. Secured cards place limits on a line of credit based on the amount a consumer deposits to secure the account.
Should you go over your credit limit?
No. It is best not to go over your credit card credit limit. Issuers sometimes charge overlimit fees when cardholders attempt to extend credit beyond a credit limit. Federal law requires cardholders to accept these charges, and you may decline to charge more than your credit limit. If you unsubscribe, you will see a transaction decline when you see your limit. Even when they have chosen to exceed the fee limit, cardholders may also see a declined transaction when attempting to make a purchase if they have exceeded or are about to exceed a credit limit.
If possible, stay away from exceeding a limit. A credit limit affects your credit score by influencing a factor known as credit utilization. Your credit usage rate compares the overall available credit across all accounts to the amount of available credit you’ve used. CIBIL recommends consumers keep credit utilization below 30%, but we recommend keeping it below 10% for best results.
Since banks may report your monthly balance at different times, the easiest way to limit your credit limit is to make payments on a balance throughout the month and ensure that the entire balance is paid off. before its due date.
The higher your credit limit, the more you can spend before your credit usage becomes an issue. This introduces more flexibility to how you use your credit card, but creating debt with a higher limit is much easier.
What happens if you go over your credit limit?
The most common consequence of exceeding a credit limit is a declined transaction. When you use the card for a purchase, the card will be declined and you will need to provide an alternate form of payment or forfeit the purchase.
In many cases, if you have opted for the overlimit fee, you may be charged a fee if you extend credit beyond the credit limit. These charges are outlined in any cardholder agreement, so if you’re concerned about incurring a charge for exceeding a limit, check your cardholder agreement for details. You must have agreed to over-limit fees and some issuers have “opt-out” options to help you avoid them. If you go over a limit while you’ve disabled overlimit fees, your transactions will be declined. According to the Credit Cards Act 2009, the overlimit fee must be fixed and must not exceed the overlimit amount. The overlimit fee is usually 2.5% of the overlimit amount.
Tips to avoid going over your credit limit
Having a plan to avoid extending credit beyond a limit can help avoid a major financial headache. The first step is to find out:
Be aware of your credit limit
Know what your credit limit is. Knowledge is power and you can equip yourself to avoid the consequences of going over the limit simply by knowing where the limit is. Log in to your online account or check a recent billing statement to see your card’s credit limit. You can also call the credit card issuer.
Credit card issuers can lower or raise credit limits automatically based on regular credit checks. It is therefore essential to regularly check your limit to ensure that you know what it is.
Disabling Over Limit Fees
A card issuer usually needs your authorization before charging you a credit limit fee. You are not required to provide authorization. Instead, decline transactions that would take you over the limit. Rather than allowing you to continue making purchases when you go over the limit, the card will be declined.
Examples of India-based credit cards and their overage fees:
Keep your balance to a minimum
Keeping a balance below 30% of the credit limit will help your credit improve and help you stay clear of any limits. While you can hit a limit with one card and use other unused cards with lots of available credit to reduce your overall usage, maintaining minimal balances can still help you out of the danger zone.
Choose to receive balance notifications
Some credit card issuers will automatically send an SMS or email when you reach a certain balance on the card. This alert level can be a value in rupees or a percentage of the total limit. Speak to the card issuer’s customer service or check your account settings online to see if you can receive these alerts to help you avoid getting too close to a limit.
Conclusion
Credit cards offer a great way to maintain financial freedom while building credit, but it’s important to use them responsibly. Responsible use of credit involves maintaining balances well below credit limits. Knowing your card limit and keeping your balances much lower can help you maintain better credit and avoid overlimit fees in many cases. Always make payments on time and in full to avoid debt and damage to credit history.
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