Maxing Out Your Credit Card: What to Expect When You Go Over Your Credit Limit?
Credit limit is the maximum amount you can charge on a particular credit card or other type of credit account. It’s determined mainly based on your credit score, personal income, and payment history. If you have a good credit history and a high income, you will likely get approved for a higher credit limit, which gives you more purchasing power. Standard personal credit card limits usually start at $500 and go up to $15,000. However, some cards have no preset limit or set it up to $100,000. But even with a high limit, it’s not a good idea to use it all.
How does a maxed-out card affect transactions, credit scores and payments?
When you go over the credit limit on a credit card for one reason or another, it’s maxed out, meaning that there’s no credit available for purchases or other transactions until you reduce your balance.
Hitting the limit on your credit card can be a stressful situation. It doesn’t spell the end of your personal finances, but it can put you in a tough spot. Below are some major consequences of maxing out your credit cards:
1. Declined transactions
When you reach your credit limit, you typically don’t have any room for spending. Depending on the issuer and your credit profile, credit card issuers may decline a transaction. This can be frustrating, especially if you need to use the card for emergency expenses. Your card will be practically useless, until you start paying off the balance.
With other lenders, you may go over your credit limit without worrying about your card being declined. However, do keep in mind that credit card issuers may approve transactions made on a maxed-out card but charge what’s called an over-limit fee. So be sure to check with your lender about all the terms of its over-limit coverage program before you enroll.
2. Credit score drop
Another result of maxing out a credit card is the impact it can have on your credit scores.
Reaching or even exceeding the limit on a credit card affects your credit utilization ratio, or the amount of credit you’re using compared with the amount of credit you have available. Credit utilization is among the major factors that significantly impact your credit score. And most financial experts recommend keeping credit utilization below 30% to maintain a healthy credit score.
3. Increased minimum payment
The minimum payment is the smallest amount you must pay each billing cycle to avoid penalties and fees. Credit card minimum payments are usually calculated based on your monthly balance. So, if you max out a credit card, your balance will go up. That, in turn, can raise your minimum monthly payment.
Moreover, for large unpaid balances, minimum payments may be calculated at a fixed percentage, such as 2%. Credit card companies may ask you to pay the amount by which you’ve gone over your limit, or even require to pay the entire balance. It is also possible that you may be asked to pay immediately rather than on your normal due date.
4. Penalty APRs
Your monthly payment may increase in another way. If you fail to pay the monthly minimum for 60 days, your credit card issuer will replace your current APR with a higher penalty interest rate. This will increase how much you owe and can make it difficult to get out of debt.
What can you do to get back on track?
If you’ve maxed out your credit card limit, try to pay it off as soon as possible. If you pay your balance in full each month and have outgrown your credit limit, you may want to consider a credit limit increase or a new card.
• Use debt payment methods
If you’re unable to pay off your credit card balance in full every month, two popular methods of paying off debt could help.
The snowball method involves making at least the minimum payments on all of your accounts. You’ll start by settling your smallest debt first, followed by the next-smallest debt, and so on, until you are debt-free.
The debt avalanche method works just the opposite way – you try to pay off the highest-interest debt first, but still make at least the minimum payments on other accounts. When you’ve paid off that highest interest rate, you move on to paying off the next-highest interest rate debt.
• Consider debt consolidation
When you feel trapped, you may want to consider credit consolidation. This allows you to combine debts into a single monthly payment ideally at a lower interest rate than what you’ve been paying. You can consolidate your debt from different credit cards into a personal loan that typically offers a lower interest rate.
• Set up balance notifications
Some credit card issuers automatically send a text message or email when you reach a certain balance on your card. Check with your card issuer or look through the settings in your online account to see if you can have these alerts so you don’t exceed your credit limit.
• Avoid overspending & keep your balance as low as possible
When you’re trying to get control of your finances, avoiding overspending could be a good place to start. Also, keeping your balance below 30% (or even better, below 10%) of the credit limit will help to improve your creditworthiness and keep you from going over your limit.
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