A credit limit refers to the maximum amount you can spend using your credit card. When you apply for a credit card, it comes with its credit limit. Banks and lending institutions determine the credit limit on factors such as your credit score, existing liabilities, credit history, and income among others. Although the issuer sets the credit limit, it can be revised depending on certain factors. No matter what your credit limit is, spending beyond the assigned limit is just not recommended. Read on to know more about credit limits and the reasons why exceeding it is almost always a bad idea.
What Happens When you Go Beyond your Credit Card Limit?
Credit card issuers offer you both options – to transact beyond the credit card limit and to decline the transaction when exceeding the credit limit. Any transactions approved beyond your credit limit would be subject to over-limit fees. There is no single rule regarding the restriction on over-limit spending on your credit card. This final restriction differs from credit card to credit card. As a rule, you must not avail the over-limit facility unless there is an emergency.
Why Exceeding your Credit Card Limit is not Recommended
There are several reasons why you should avoid maxing out your credit card and spending anywhere near your credit limit. Apart from having to pay an over-limit fee, the consequences of spending over your credit card limit may be:
Your credit score will plummet.
Your interest rates could see an increase
Your credit limit might be lowered
Your credit card might be declined
You may lose your chances of availing of a loan against your credit card in times of financial emergency.
In case there are too many over-limit charges, your bank or credit issuer might close your credit account.
Thus, with so many negative financial consequences, it is best to avoid spending beyond your credit limit.
What is the Best Practice?
The best practice is to have a low credit utilization rate. Credit utilization rate or ratio refers to the amount of credit that is being utilized divided by your credit limit. Experts commonly recommend keeping your total credit utilization rate below 25 or 30 per cent. If you are aiming for a high credit score, keep it to 10 per cent. It must be noted that up to 30 per cent of your credit score is based on your credit utilization ratio. A good credit score indicates your creditworthiness and makes you eligible for a credit limit increase, enjoy lower credit card interest rates, get better rewards with credit cards, and gain approval for securing loans.
Some tips you could use to avoid going beyond your credit limit are as follows:
Review your credit card balances regularly to find out how much credit remains. You may accordingly plan and spend below that amount.
Request your card issuer for a credit limit increase. You must take care not to exceed your new credit limit.
Repay your balance as early as possible. Paying off your existing credit card balance allows you more credit to spend on future purchases.
Depending on your credit history, you may always apply for a high-limit credit card.
Whether you already have a credit card or are planning to apply for an instant credit card, it is important to set and stick to guidelines regarding how you use the card. Not only should you not max out your credit card, but you must also try to maintain a low credit utilization rate and make timely payments.
0
Sign in to leave a comment.