What Happens if I Go over Credit Limit?

Two things happen, typically, when you go over your credit limit. First, you'll be unable to use that particular credit account until the outstanding balance is brought below the credit limit, either by paying down the balance or having the credit limit increased. Second, your credit account will be charged an over-credit-limit fee. There are two other possibilities, depending on your credit issuer and the credit agreement. There's a good likelihood that your interest rate may increase, sometimes dramatically, and your credit issuer may report your transgression to one or more of the credit reporting companies, though this doesn't happen all the time.

Traditionally, when consumers open a credit account with a company, whether it's a credit card or an account good only within a particular store or chain of stores, the issuer of credit puts a cap on the amount of credit that will be extended. This is called the credit limit. Historically, whenever a credit consumer used a credit account to make a purchase, the vendor would contact the credit issuer and request approval, which was granted if the account was in good standing and the purchase wouldn't push the outstanding balance over the credit limit. If the purchase would result in the balance going over credit limit, approval would be denied. The only way an account could go over credit limit was if monthly service and interest charges, when added to an outstanding balance, pushed the account balance over the credit limit before receipt of the monthly payment.

The practice gradually changed, though, to one of approving credit purchases as long as the account was in good standing and the balance before the charge was below the credit limit, regardless of what the balance would be after the charge. This adjustment to standard practice was a convenience for credit consumers and a boon for credit issuers: every such approval generated an over-credit-limit fee. Credit issuers and some consumers supported this practice because of the accommodation of consumers; consumer advocates opposed it because of the additional costs imposed on consumers without first alerting them that approval would trigger an over-credit-limit charge. Consumers' credit accounts can also go over credit limit when the credit issuer reduces the credit limit to a level below the outstanding balance, an uncommon but not unheard-of event.

Credit issuers generally won't report over-the-limit occurrences to credit reporting agencies, but they do report the outstanding balance and the current credit limit, making it easy for a potential issuer of credit to see that the consumer has gone over credit limit. Another thing they'll do is increase the interest rate, often by dramatic amounts as high as double the original interest rate. This is another item that will show up on a consumer's credit report, and could trigger other credit issuers to take adverse action themselves. Many credit agreements include provisions permitting the credit issuer to increase interest rates if any other credit issuer takes punitive action.

There are two ways to avoid a charge if you go over credit limit. The first is to make a payment directly to the issuer the day the limit is exceeded, because balances are reviewed only at the end of business. The second is to contact the credit issuer and request an increase in the credit limit. The more creditworthy a customer is, the better chance that this request will be granted.

Consumers are well advised to monitor their use of credit. As a rule, credit scores begin to decline once more than a third of a consumer's available credit is actually used. Thus, it's inadvisable for consumers to let their credit balances even approach their credit limit.