What Happens if You Spend Over Your Credit Card Limit?

The maximum balance given by a credit card issuer to the users is called the credit limit of the credit card. It gives the issuer the power to control the expenditure pattern of the users via credit card. It also assists you to maintain a decent credit score. However, the credit limit is influenced by various factors such as your income, credit profile, and so on.

The ratio of credit card limit to credit card balance is called the credit utilisation ratio, which contributes a lot in determining the credit score. A high credit utilisation ratio leads to a low credit score.

Credit over-limit refers to the situation when you use your credit card beyond the specified credit limit. Credit over-limit is a facility allowed to all credit card users. You can have the option to either cancel the transaction that crosses the credit line or to continue the transaction over-limit. Though it is a facility offered by the issuer, you should remember that such over-limit credit use is generally subjected to certain terms and conditions.

1. Credit Card Act

The Credit Card Act of 2009 amended the amount and the kind of fees that you will be liable to pay for an over-limit transaction.

• The issuer can charge credit over-limit fees only if the cardholder has subscribed to over-limit protection schemes.

• The cardholders will not be charged credit over-limit fees if over-limit protection schemes are not subscribed. In such scenarios, the user cannot make transactions beyond the credit limit.

• The Act specifically mandates that credit over-limit fees should be fixed and not more than the over-limit amount. For example, if a credit card is over-limit by Rs.150/-, the fees charged by issuers cannot be more than Rs.150/-

The credit limit on your credit card is determined by various factors. Some of those factors are:

• Credit History: Your credit history plays an important role in determining your credit limit. It is the first thing that issuers take into consideration while approving your credit limit application. For people borrowing for the first time, issuers take a huge risk by giving you money, and to decide your limit they should know if you are worth taking the risk.
  

• Debts and Income: The second factor that the issuer will take into consideration will be your income. Clearly, your income would influence your power of debt-paying capacity. But issuers don’t just consider your income, they consider the debt-to-income ratio. They consider your current debts and your ways to manage them. A high income-to-debt ratio leads to a lower credit limit on your new credit card.

• Credit Utilization: If there is a lot of unused credit on your current credit cards, it showcases you as someone who is financially planned and responsible, someone who knows how to use available credit in a disciplined manner. Issuer notes this as a good sign and this can get you a higher credit limit.

• Existing Credit Limit: Issuers also take cues from your existing issuers and credit card providers. Your current limit would also contribute to deciding the new credit limit. For example, if you are already a premium member of SBI bank with a credit limit of around 2 lakhs, getting a higher credit limit of around the same amount is very much possible.

• Kinds of Credit Cards: Banks and Issuers offer a wide variety of credit cards that have different features and policies. Each type of credit card has a minimum and maximum amount of credit limit which is specified by the issuers and is not affected by factors like your income or credit score.

Mostly all issuers charge the penalty of over-limit fees on credit cards; however, this facility is subjected to terms and conditions as well as some consequences. The consequences differ in case you have chosen an over-limit protection plan or not; it is a feature that offers you to spend more than your credit limit. Over-limit protection plans allow you to occasionally spend over the credit limit, but that also comes with consequences. On the other hand, if you do not have an over-limit protection plan activated, your over-limit credit transaction would be declined.

Some of the common consequences that you might have to in case of over-limit credit transaction are:

• Declined credit card

• Over-limit charges

• Increase in interest rates

• Decreased credit limit

• Decreased credit score

• Deactivation of a credit account by the issuer

You can calculate the credit card over-limit fee on the outstanding balance above the credit card limit. Most financial institutions charge a penalty of 2.5% on the exceeding amount or ₹500, whichever is higher.

1. Credit over-limit fees applied by various banks: