What happens when you exceed your credit limit?

If, like many other consumers, you juggle more than one credit card, it can be difficult for you to keep track of each one’s credit limit. So what happens if you end up spending more than the credit limit you have on any of your cards?

The Credit Card Act of 2009 provided consumer protection that was not available prior to the passage of the law, including for transactions over the limit. And the Consumer Financial Protection Bureau (CFPB) has clarified what requirements must be met in order for your card issuer to approve and charge you for your overlimit transaction.

You will need to agree to an over-limit arrangement

The default clause is that you cannot go over your credit limit, and the card issuer will have to give you the option to agree to go over your credit limit.

You do not agree by simply applying for a credit card. When you apply for a card, the issuer may provide a notice allowing you to use the over limit mechanism. The selection should be a separate provision, not tied to other features of the credit card application.

The issuer may also send you a separate form with your monthly statement or other communication to get you to agree to overlimit transactions. You can also call or email the issuer to confirm your consent.

In addition, the card issuer will need to confirm that you have agreed to this feature before activating it on your account. The law prohibits a card issuer from associating an offer of a higher credit limit with your agreement to overlimit protection. The issuer also cannot require your consent as a condition of approval of your loan application.

What is the fee for exceeding the credit limit?

If you exceed your credit limit after registration, the CARD Law sets a limit of $25 as a reasonable amount for a first breach and a limit of $35 for any subsequent defaults within six months.

The CPFB capped penalties at $30 and $41 for 2022. In any case, the penalty cannot exceed the amount by which you exceeded your limit. Also, while the issuer may charge you fees in excess of the limit, they may not charge you a recurring fee just for allowing you to use this feature.

What to do if recurring or interest payments exceed your limit?

In certain circumstances, the card issuer may be required to confirm a transaction that pushes you to exceed your credit limit, even if you have explicitly disagreed.

For example, you make a $20 purchase and another recurring payment is posted before that amount is deducted from your account. When $20 is subsequently withdrawn, it forces you to exceed your credit limit. In these situations, the issuer cannot charge you a penalty for exceeding the credit limit.

Another important case is that interest payments for the billing cycle push you to exceed the credit limit. The issuer also cannot charge you a penalty for doing so. In addition, the card issuer leaves it up to you whether to approve a transaction above the set limit, even if you have agreed to this agreement. The issuer may also refuse to further grant your request for consent if, at any time, it sees that you are exposed to credit risk.

You have the option to opt out of the over limit agreement. In this case, you are still responsible for the penalties for transactions that caused you to exceed the credit threshold before you opted out. The law does not allow an authorized cardholder who does not share joint liability with the cardholder for an account to choose or opt out of overlimit protection.

Exceeding your credit limit can damage your credit history

If you exceed your credit limit, the question is how well you manage your available credit. Choosing this scheme is not a jailbreak card and there are consequences for exceeding your credit limit.

First, the amount of your available credit that you use affects your credit score as input to credit use. If you make the most of your card, it can lower your credit score by more than 120 points, according to FICO. You may also see your interest rates rise if lenders see you as a higher credit risk after your over-the-limit spending is shown on your credit report.

bottom line

If your income has increased and you can justify the extra expense, you can ask your issuer to increase your credit limit. Otherwise, you should strive to be responsible with your spending and not consider going over your credit limit as a choice.

Punkulali Thangavelu is a senior correspondent for CreditCards.com. She focuses on legislation and regulation, analyzing how public and private policies affect card users. She has extensive experience in personal finance and business journalism and loves to simplify such topics so readers can make the right decisions. Punculali is also the author of CreditCards.com’s bi-weekly Fine Print column. Her career includes consumer market research for the global advertising agency Ogilvy & Mather.