Credit cards have their limits, but it is often possible to exceed them. And is going over your credit limit bad? When you go over your credit card limit, two key things can happen: you pay over limit fees and damage your credit score.
Due to restrictions in the Credit Card Liability, Liability and Disclosure Act, some issuers have stopped letting cardholders spend beyond their credit limits. Others still have a credit card equivalent to overdraft coverage. This option, however, comes at a price. If you exceed your limit, you will be charged an over limit fee of up to $ 25 for the first instance and up to $ 35 for the second, depending on the Consumer Financial Protection Bureau.
Your credit score can also end up taking a hit.
Raising Your Credit Limit Equates To Being Overexploited
Credit utilization, or credit utilization ratio, is the amount of debt you carry relative to the credit you have been granted. The use of credit, also known as the use of debt, is a major component of most credit scoring models. To maximize your score, it’s generally recommended that you keep the amount of debt you owe – collectively and on individual credit cards – below 30% and ideally no more than 10% of your total available credit lines.
Think of a credit card with a credit limit of $ 2,500 and a maximum balance of $ 2,500. It is a 100% use of credit. To hit the 10% sweet spot, you must have a balance of up to $ 250 on this card. The maximum limit of 30% does not exceed $ 750.
Maximizing your credit cards lowers your credit scores. The amount of your score hit will vary depending on your score at the time you maximized the account. For example, a person with a good score of 780 would take 25 to 45 points to use up their entire available credit limit, according to a test case conducted by the popular credit scoring model Fico. FICO,
Raising your credit limit is bad news
Going beyond your limits makes things worse.
“The FICO score can be the difference between someone who has reached their 100% credit limit used on their revolving credit obligations and someone who has exceeded their credit limit more than 100% used,” said Ethan Dornhelm , Senior Scientist at FICO. in an email. “Our study found that consumers with a renewable usage rate greater than 100% have a higher risk of default than consumers with a usage rate of 100% or less.”
VantageScore, another popular credit scoring model, can also penalize consumers for exceeding their limits, although, according to a spokesperson, it caps usage at 110% – meaning if your usage is actually at 120%, it would only be considered 110%. .
That 110% on your credit card with a limit of $ 2,500 would equal a balance of $ 2,750.
“Generally speaking, if someone goes over their limit, it negatively impacts a score,” Rod Griffin, director of public education for Experian EXPGY,
said in an email. “The fact that you have exceeded your limit, regardless of how it is exceeded, is considered negative.”
Keep your credit online
Of course, going over your credit limit only affects your credit score if the issuer reports the misstep to the three major credit bureaus. Some may not, and in other cases, you can keep it out of your reports by paying off the excess balance before your statement bill date. You can check with your card company to find out how and when they report a balance over the limit to the credit bureaus.
Also see: Are you overestimating the value of your travel rewards?
Regardless of how the credit card companies deal with it, it’s a good idea to avoid charging over your credit limit. And an even better idea is to avoid charging over 30% of your limit.
If you need to maximize your credit card, pay off the excess quickly. In addition to the initial over limit fee, you could face an APR penalty if you don’t. pay additional charges in full at the end of the month.
If you have high credit card debt, there are other ways to improve your credit score than paying off your balance. You can also request a higher credit limit from the card issuer. Or, you can get a second credit card to increase your credit limit. A higher limit – even for two credit cards – reduces your credit card usage.
To see how your credit card balances affect your credit scores, Check your credit score regularly. Your credit report card includes a view of your credit usage. And your score and report card are updated every two weeks.