Dubai: By maxing out your credit card, you’ve reached your credit limit, which is the maximum amount of credit a lender can extend you at the time. But what if you went over the credit card limit and you didn’t know you were anywhere near the withdrawal threshold? What should you do next?
“The most immediate consequence of exceeding a credit limit is your transaction gets denied,” said Essam Kabeelali, an Abu Dhabi-based credit advisor. “When you use the card for a purchase, the card will be declined and you'll need to provide another payment method or forgo the purchase.
“But this also depends on whether or not you opted in for ‘over-limit protection’, a feature that allows you to spend over your credit limit. ‘Over-limit protection’ programs give you the freedom to make occasional over-limit purchases, but they also have significant consequences.”
So if you didn't enable ‘over-limit protection’ on your credit card account, your transaction will probably be declined. Also, if you did opt for ‘over-limit protection’, your charge might go through — but you could get hit with fees of about Dh200, higher interest rates or lower credit limits.
Other repercussions to going over credit limit
“If you do keep going over your credit limit, you signal lenders that you are overextending yourself financially. As a result, your credit card issuer might reduce your credit limit,” explained Rupesh Naish, a Dubai-based debt advisor and credit analyst.
“If your credit card issuer decides to reduce your limit and you have opted into the over-limit program, know that they can’t charge you any over-the-limit fees for exceeding your new limit for a period of 45 days after the issuer gives you a notice.”
Another aftermath to repeatedly going over your credit limit is that it could cause your credit score to drop. This happens if the balance is over the limit when it’s reported to the credit bureau. Also, going over your limit regularly could result in your account being closed by your credit card issuer.
How to avoid going over your credit card limit?
“To avoid a declined transaction or a hefty over-limit fee, start by knowing your credit limit. Also, monitor your spending. Before you decide to make another purchase, check your credit card balance to make sure you have enough room,” added Kabeelali.
“Many credit cards allow you to sign up for notifications, which alert you when you're getting close to your credit limit. You can use this to prevent overspending and over-limit fees. You can even set your notification to let you know when you are about to exceed the recommended credit utilisation rate.”
While keeping track of your credit card spending helps you determine why you keep going over your credit card limit, Naish added that by identifying your spending habits, you will eventually be able to make a few adjustments that can help you stop going over your credit limit.
Different alternatives if your credit limit is low?
“If your credit limit is too low, you can request a credit limit increase. If you have a steady job and a long and strong history of responsible credit card use, your credit card issuer might grant a higher limit,” said Naish.
However, if you’ve struggled to pay your credit card bill on time and have a history of late and missed payments on your credit card dues, you may have to look at other options, like transferring your current credit card balance to a new card with a lower interest rate.
“Consider applying for a balance-transfer credit card if you have a high interest rate and you’re struggling to pay off your balance. A balance transfer credit card allows you to move your high interest debt to a card that offers a much lower interest rate for a period of time,” he added.
Steps to take if you mistakenly went over the credit limit
Step #1: Set up a payment plan
Once you know how much you can pay toward your credit card each month, you can create a plan for paying down your balance. Use a credit card calculator, which are freely available online, to figure out how long it will take to pay off your credit card balance based on your monthly payment.
“Bring your balance down even faster by taking advantage of opportunities to make extra payments. If your maxed-out card is a rewards card, consider redeeming any accumulated rewards for a statement credit to bring your balance down,” added Kabeelali.
Step #2: Negotiate a lower interest rate
“If you have a good payment record, you might be able to negotiate a lower interest rate, despite the fact that you've maxed out the account. Getting a lower interest rate is one of the best ways to pay off a high credit card balance sooner.”
However, a prudent fix recommended by credit experts is to make higher payments even after you get the rate lowered. This is so that more of your money goes toward reducing the principal balance and decreasing what you owe faster.
Step #3: Transfer your credit card balance
If your credit card company won't budge on the interest rate, see if you qualify for a credit card with a zero per cent introductory rate. These cards typically offer zero interest on balance transfers and purchases for the first 12 to 18 months.
You can transfer your existing balance and make higher payments during this period to pay off the card. However, this strategy can only work if you don't accumulate new debt. After transferring your balance to the new credit card, get rid of the old credit card.
While it is never a good idea to go over your credit limit, the consequences of going over your credit limit, even if you opted into over-limit protection, tend to outweigh the benefits of making an additional purchase on your credit card.
Any approved transactions above your credit limit are subject to over-the-limit (or over-limit) fees. If you do accidently go over your credit card limit when shopping, the default for any transactions over your credit limit may be that the transaction is denied.
However, if your card issuer charges an over-limit fee and asks for your one-time consent and you approve, you can change your mind and opt-out at any time. If you don’t opt-in, your card issuer will decline any purchases you attempt to make over your limit.