Credit is a great convenience, but it's a convenience that you will pay for — especially if you go over your credit limit.
Traditional over-limit fees were radically changed by the Credit CARD Act of 2009, which switched credit card over-limit fees to an opt-in basis — meaning that consumers have to specifically consent to pay over-limit fees and must have the ability to opt out at any time. The Consumer Financial Protection Bureau (CFPB) estimated that the change in over-limit fees produced a saving of $9 billion for Americans between 2011 and 2014. However, there are still a number of consumers that pay directly for going over their credit limit.
Why would anyone choose to pay these fees? In some cases, it may be that consumers simply don't pay attention to the terms and conditions and opt-in, not understanding the consequences. In other cases, it's a decision based on spending habits.
When banks apply a strict limit, retailers must reject any over-the-limit transaction. Some consumers choose to retain the option to go over their limit if necessary. (Imagine having your credit card rejected on a first date, or while entertaining a group of business clients.) The fees that you incur must be traded off against the risk of embarrassment or the inability to cover a bill with an alternate card.
Banks offer various forms of over-the-limit protection, including linking with a checking or savings account that automatically transfers funds to cover the shortfall. If you wish to opt in to such protections, be sure that you fully understand the fees that are associated with the protection. Compare your options with other card offers if you find the fee structure to be unsatisfactory.
Aside from declining a transaction if you have not opted in for overdraft protection, banks have other methods of making you "pay" for going over your credit limit. They have the option to accelerate your payment schedule, raise your minimum payment amount, revoke your eligibility for certain rewards, reduce your credit limit, raise your interest rate or charge a penalty APR, or even cancel your card for large or chronic overdrafts.
In addition, your credit score may be affected in multiple ways by surpassing your credit limit. Lenders have the option of reporting your breach of your credit limit to the credit reporting agencies. At best, your overall credit utilization (the amount of credit in use relative to your total available credit) will go up, sending your credit score down. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
Many cards offer some form of alert that notifies you when you are approaching your credit limit. By taking advantage of these alerts, you can reduce the likelihood of going over your credit limit and feel more confident in going without over-the-limit protections that open the door to fees. If all else fails and you know you will be over your limit for a time, contact your card issuer. They may be able to approve an increase in your credit limit, at least on a temporary basis.
It's wise to understand what happens when you pass your credit limit, but consider this: no matter how well you search the terms and conditions in your credit card agreement, you will never find any benefit to you in going past your limit. All the benefits are for the creditor. The best you can hope for is no damage. Why even risk it? Know your credit limits and stay under them. This will help you preserve your peace of mind as well as your credit score and bank account.
If you want more credit, check out MoneyTips' list of credit card offers.