Using your credit cards as a tool for financial stability is a great way to ensure you’re never strapped for cash during an emergency. But if you’ve used your cards as “extra” money to buy frivolous purchases in the past, you could be setting yourself up for a disaster.
Staying in debt can cause you to have less available credit, which puts you at risk of going over your credit limits. If you’re trying to increase your available credit by paying down debt, try using the debt snowball method. This can help get you back on track.
What’s so bad about going over your credit limit? Here are a few things you need to know:
You’ll be hit with an over the limit fee
If you check your cardholder agreement or monthly statements, you’ll see a list of fees you might be charged if something negative happens with your account, such as bounced payments or going over your limit. The fee you’ll receive for going over the limit will most likely be charged every month until you’re back under the credit limit.
Fees vary by institution, but you can assume you’ll be charged somewhere between $50 and $80 on each monthly statement.
Your credit utilization will increase and your credit score will decrease
Your credit score is based on a few variables. The most important factors are the percentage of on-time payments you’ve made and your total credit utilization. The credit utilization number is a percentage based on how much total credit you have divided by how much credit is used every month.
Ideally, you’ll want to have under 29% credit utilization to get the best credit score. But if you go over your limit, your credit utilization percentage will increase. Unfortunately, since your utilization rate heavily impacts your credit score, you can expect to see your score go down.
Your card could be declined
Some creditors will allow you to continue using the card even if you’re over your credit limit. Others, however, will stop approving purchases until you’re back under your limit. It varies based on the company, so check your user agreement to know which boat you’re in. You can also proactively contact your credit card company and let them know you want any purchase that puts you above your limit to be automatically declined.
Should you ask your credit card company to let you keep making purchases when you’re over your limit? While it’s nice to have the ability to make emergency purchases if you need them regardless of your limit, it’s probably best to prevent the chance of going over your limit from ever happening.
Your interest rates could go up
When you open a new card, your creditor sees your account with a certain level of risk. If you’re able to lower the amount of risk they see by paying your bills on time and either paying your card off in full or spending below your limit, they may reward you by increasing your credit line or lowering your interest rates.
The opposite happens when you go over your credit limit. The bank now sees that your account is at risk of never being paid in full, so they’ll begin to mitigate that risk by charging more fees. It might sound counterintuitive; if you can’t pay your credit card down now, how would a higher interest rate help? Your creditor understands this but sees the increase in interest rates as a long-term strategy. The longer you’re indebted to them, the more they’ll make over time.
Getting your interest rate back down to a more competitive offer could take years or mean you’ll need to find another bank that’s willing to offer you credit.
Final thoughts
We all get put into situations where we need to find money quickly. Taking steps to get out of debt allows you to use that credit at times when it’s really needed. Don’t get caught in a position where you’re over your limit because of poor spending habits because you’ll have to deal with fees and long-term effects on your credit.
