Why You Should Never Go Over Your Credit Card Limit

Owning a credit card means having easy access to funds. Used responsibly, credit cards can be instrumental in making a person's life simpler. However, if used recklessly, these instruments of credit may end up doing more harm than good.

One of the evils of having a credit card is that the cardholder may be tempted to spend beyond his or her means. Although all credit cards have spending limits, many card issuers offer their clients what amounts to a credit card version of an overdraft charge. Through this facility, a consumer can spend more than the authorized amount. However, going over the credit card limit can have some pretty awful consequences. Apart from costing an individual extra penalties or fees, it can even affect his or her credit score.

In case you're wondering how going over your limit could potentially damage your credit, allow me to explain. The proportion of debt that you carry in comparison to the amount of credit that has been extended to you is known as your credit utilization ratio. This ratio is a significant component of most credit scoring models. To maximize your score, experts recommend that you keep the total amount of debt owed (collectively and on individual credit cards) below 30%. Ideally, the total amount of debt owed should be kept at 10% of total available credit lines. Going by this rule, it’s obvious that maxing out credit cards can have a detrimental effect on your credit score.

The amount of hit taken by your score will depend upon your then current score when the card was maxed out. According to a test scenario conducted using the credit scoring model, FICO, someone with a score of 780 may be set back by as much as 25 to 45 points for using all of their available credit. If the credit card limit is surpassed, matters might become even worse.

Credit scoring models are likely to penalize someone who has exceeded their credit limit more heavily than someone who is at their credit limit. This is because consumers with revolving utilization ratios in excess of 100% are viewed as more likely to default than consumers who are at or below 100% utilization.

Once you rectify your situation, your credit report will change quickly. However, if you routinely exceed your credit card limit, then this blemish will recurringly appear on your credit report.

Credit card companies can exercise numerous options when you attempt to make an over-the-limit purchase. If the amount is small, the card issuer is likely to allow the purchase – more so if the limit had not been reached prior to the transaction. For a large purchase that goes over the authorized limit by a greater amount, the card company may increase the limit. This is especially likely if you have an excellent credit score or haven't had a recent credit line increase. On the other hand, the card company may choose to refuse the transaction.

Sometimes card issuers charge extremely high penalties for allowing over-the-limit purchases. The amount owed on such expenses become due immediately and customers are charged a fee – both for going over the limit and for not paying the overage amount right away. Credit card companies can also treat going over the limit as an excuse to raise interest rates to the penalty rate stated in your cardholder agreement. By and large, it would be wise to refrain from this practice because of the large amount of fees involved.

Overall, it can be safely concluded that going over your credit card limit is an event that should be avoided if possible. Moreover, if it's business financing that you require, the team at Fund&Grow can help you get unsecured credit in the range of $50,000 – $250,000 at 0% interest, with no backend fees and without proof of income ... guaranteed! Sound too good to be true? Call us at (800) 996-0270 to learn more today!