Balancing your finances can be a little like walking a holiday-spending tightrope. Should you authorize your credit card company to approve over-the-limit purchases and end up paying hefty fees if you do go over? Do you really want to run the risk of having your card declined when you’re in the company of friends, family or business associates? If you decide that’s not an acceptable option, you have a few alternatives for minimizing the damage.
Your Credit Limit – And Why It Is What It Is
Credit limits are in place for a reason. This limit is the amount of money your lender feels comfortable advancing to you and confident that you can pay this much back. Your credit limit is typically based on your income and other financial background information you disclose in your application. Your limit should be clearly explained in your contract with the lender, and your contract should also allow you to opt in for over-the-limit charges – along with the corresponding fees. Your credit card lender will decide just how far over your limit you can go based on your credit profile and history.
About Those Penalties and Fees
If you exceed your credit limit, you will most likely get hit with an over-the-limit fee. The good news is that the Credit Card Act of 2009 prohibits lenders from charging more than one late fee per billing cycle. The bad news is that if you go over again in the next billing cycle, the fee will probably be more than it was the first time. However, it won’t exceed the amount by which you’ve gone over.
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Your interest rate may go up as well, and the overage can affect your credit score. One of the factors used to calculate a consumer’s credit score is how much of his or her available credit he or she’s used. If you have a card with a $3,000 limit carrying a $3,100 balance, you’ve used up more than your available borrowing power, or credit, on that card. This can bring down your score.
Did You Opt In?
The Credit Card Act of 2009 also requires that credit card lenders have your consent before allowing you to charge over your limit and imposing those over-the-limit fees. These terms should be clearly outlined in your contract. If you want to change your status, talk to your credit card company with the request. You can do so at any time, although the change probably won’t impact any over-the-limit purchases you’ve already made.
If you’ve reached your credit limit and haven’t opted in for over-the-limit purchases, your card will most likely get declined the next time you use it. Your lender probably won’t approve the charge otherwise.
You’ve Gone Over – Now What?
There may not be much you can do to eliminate that over-the-limit fee, but you can help your credit score by making a payment as quickly as possible so your balance drops as far below your credit limit again as possible.
If the charge that put you over the limit was a mistake, try negotiating with either the merchant or your lender. Let’s say that you have one card with $1,000 available credit left and second card with just $10, and you accidentally use your second card for a $300 purchase. If you catch your error in time, ask the merchant to refund or reverse the charge, and use your first card with the larger limit left instead. As always, make sure you have the funds to pay off both cards by the time your bills come.
How to Prevent Going Over Your Limit
If you’re between a rock and a hard place and you know that you’re going to have to make a charge that puts you over your limit, you can reach out to your lender in advance and ask for a credit limit increase. If your account is in good standing and you don’t have a record of late payments, you may be approved. It helps if you’ve been a customer for a while and you’ve never made such a request before. You can even try asking for a temporary increase until you can get your financial situation straightened out.
Another option might be to use two or more cards to cover a major purchase. If you have to spend $900, you may be able to charge $300 to each of three cards and keep your balances well below their credit limits.
Most lenders also let you opt in for credit limit alerts. If you’re getting close to your limit, the company will email or text you to let you know.