Credit cards certainly have their limits, but it is often possible to go over them.
Thanks to new restrictions in the Credit Card Accountability, Responsibility and Disclosure Act, some issuers have stopped allowing cardholders to spend beyond their credit limits. But others still offer what’s essentially a credit card version of overdraft coverage. This option, of course, comes with a a price. If you go over your limit, you’ll be charged a fee — generally around up to $25 for the first instance and up to $35 for the second, per the Consumer Financial Protection Bureau.
You could also wind up taking a hit on your credit score.
Over the Limit; Over-Utilized
Credit utilization — essentially how much debt you are carrying versus how credit has been extended to you — 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 10% of your total available credit lines.
Maxing out your credit cards, conversely, will lower your credit scores. The amount of the hit will vary depending on where your score was at the time you maxed out. For example, someone with a good score of 780 would weather anywhere from a 25 to 45 point drop for using all their available credit limit, according to a test scenario conducted by popular credit scoring model FICO.
Going over your limits … well, it can make things worse.
“The FICO score may differentiate between someone who is at their credit limit (e.g., 100% utilized) on their revolving credit obligations, and someone who has exceeded their credit limit (e.g., more than 100% utilized),” Ethan Dornhelm, senior principal scientist at popular credit scoring model FICO, said in an email. “Our research has found that consumers with revolving utilization ratios in excess of 100% represent greater risk of default than consumers at or below 100% utilization.”
VantageScore, another popular credit scoring model, may also penalize consumers for going over their limits, though, according to a spokesperson, it caps utilization at 110% (meaning if your utilization is actually at 120%, it would only be considered 110%).
Still, “generally speaking, if someone goes over their limit, it has a negative impact on a score,” Rod Griffin, director of public education for Experian, said in an email. “The fact that you’ve exceeded your limit, regardless of how much you’ve exceeded it by, is considered negative.”
Keeping Your Credit In Line
Of course, going over your credit limit will only affect your credit score if the issuer reports the faux pas to the three major credit reporting agencies. Some may not, and in other instances, you could conceivably keep it off of your reports by paying off the balance before your statement’s billing date. You can check with your issuer to learn specifically how and when they might report an over-the-limit balance to the credit bureaus.
But no matter how credit card companies handle the situation, it’s generally a good idea to avoid charging beyond your credit limit. And, if you must, be sure to pay off that overage quickly. In addition to the initial fee, you could be faced with a penalty APR if you don’t pay off the extra charges in full by the end of the month. (You can find tips for paying off credit card debt here.) To see how your credit card balances may be affecting your credit scores, you can view your free credit report summary each month on Credit.com.
More on Credit Cards:
- Credit.com’s Expert Credit Card Shopping Tips
- How to Get a Credit Card With Bad Credit
- An Expert Guide to Credit Cards With Rewards