By Casey Bond, Contributor Aug. 24, 2018, at 9:00 a.m.
Consumers saved more than $9 billion between 2011 and 2014 thanks to over-limit fee transparency laws. (Getty Images)
Imagine sitting through a fancy dinner with your significant other or a prospective client, only to have your credit card declined when it comes time to pay the bill. For many, there's no need to imagine – they've experienced an awkward situation just like this.
What they – and perhaps you – might not realize is that this situation is avoidable by opting in to your credit card's over-limit protection. But is saving yourself the embarrassment of a declined credit card transaction worth the cost of going over your limit? Maybe not.
When you opened your credit card account, you were granted a credit limit based on your income, savings and other factors. Your credit limit is the maximum amount of credit you're allowed to use at one time. So why would you ever go over?
Often, it's simply by mistake. "Going over your credit limit can occur when you overlook your current balance or even your current credit limit," says Jennifer McDermott, consumer advocate with personal finance website finder.com. For instance, some cards have different limits for different types of transactions, such as regular purchases vs. cash advances.
"Going over your limit can also happen when you haven't kept track of your expenses or when there is a delay in posted transactions," says McDermott.
Tom Quinn, vice president of scores at FICO, says, essentially, this option exists “for the consumer who needs that buffer and might not have any alternatives such as a debit card with cash. It's a sign of potential overextension."
Before 2009, credit card companies would gladly approve transactions that exceeded cardholders' credit limits. That's because cardholders were automatically enrolled into over-limit protection programs and charged a fee every time they went over, according to Quinn.
But thanks to the Credit Card Accountability Responsibility and Disclosure Act , this predatory practice was outlawed. Now, cardholders must opt in to over-limit fees, otherwise a transaction is declined if there isn't enough available credit to cover it.
Additionally, the fee can't exceed the amount of the transaction. So, for example, if you went over your credit limit by $10, the fee can’t be more than $10. Credit card companies are also prohibited from charging more than one over-limit fee per billing cycle.
According to 2015 analysis by the Consumer Financial Protection Bureau, these changes to the law have saved consumers a whopping $9 billion in over-limit fees between 2011 and 2014.
Depending on whether or not you opted in to over-limit protection, there are a number of consequences to exceeding your credit limit, ranging from embarrassing to expensive.
Declined card. If you haven't opted in, "You could find your transaction denied," says McDermott. In this case, the transaction won't go through, and you'll have to use an alternative form of payment. Some credit card companies will approve the transaction at no cost on a case-by-case basis, but the cardholder is expected to pay back the overage amount immediately.
Fees. If you did opt in to over-limit protection, "You can be subjected to overcharge fees for exceeding your credit limit," says McDermott. "The fees will vary from card to card and company to company, but they range roughly from $25 to $35."
Increased interest rate. Another possible consequence of going over your limit is an increased interest rate, which can be even more financially devastating than the fees. "Interest rates already hit hard, and they can be even more damaging financially when accompanied by over-limit fees," McDermott says.
In addition to short-term costs, going over your credit limit can also have long-lasting repercussions on your credit.
Lower credit score. According to Quinn, your FICO score takes into account how much of your credit limit you're using. A high credit utilization ratio is a "very particular indicator of risk," says Quinn, which means your score will continue to drop as you get closer to your limit. "And in some cases, when you go over your limit, FICO will take off even more points than if you're just below your maximum," he says.
Credit limit decrease. Going over your credit limit might not be a big deal if it happens rarely. But more than once or twice could be a problem. "When you exceed your credit limit, you appear less responsible and reliable," says McDermott. "Lenders might suspect that you're unable to pay back what you’re borrowing." In turn, they could lower the amount of credit you're allowed to use.
Account closure. McDermott says that if you swipe past your credit line once or twice, it's unlikely it will result in an account closure. "However, if it becomes a frequent occurrence, [creditors] will close your account to protect themselves," she says.
