Credit Cards: What Happens When You Exceed Credit Limit And How To Avoid It?

Credit cards are increasingly becoming a go-to payment option for many. With their convenience, flexibility and potential rewards, it’s no surprise that these cards are widely used for a range of financial transactions. 

However, along with the benefits comes a potential pitfall — exceeding the credit limit. Relentless use of the credit card, exceeding the approved limit, can lead to extra charges. Surpassing the approved credit limit also affects your credit score and may lead to a financial crisis due to heavy debt.

It’s important to understand how over-limit charges work and take steps to avoid them.

Your credit card comes with a pre-defined limit, which is the maximum amount you can utilise. If you surpass this limit, the consequences could be costly. Though some credit card issuers may still allow transactions to go through, others may decline the purchase to prevent you from exceeding your limit. If the transaction goes through, an over-limit fee is charged once you surpass the approved amount.

For instance, if your credit limit is Rs 50,000 and you make a purchase that takes your balance to Rs 51,000, you could be charged an over-limit fee. While some banks may approve such transactions, the associated charges and the impact on your financial standing could be significant.

The Reserve Bank of India (RBI) has measures in place to protect credit card holders from unexpected charges. Under RBI guidelines, “usage of a credit card beyond the sanctioned credit limit (i.e., over limit) requires prior explicit consent of the cardholder.” The guidelines further add that cardholders must be given the option to enable or disable over-limit transactions through tools like internet or mobile banking. Importantly, unless the cardholder gives clear consent, banks cannot allow over-limit spending or charge any related fees.

Exceeding your credit limit isn’t just a financial inconvenience, it can also hurt your credit score. A factor in credit scoring models is the credit utilisation ratio, which measures how much of your available credit you're using. When you exceed your credit limit, this ratio increases, indicating higher levels of debt relative to your credit limit.

This can signal financial strain to potential lenders, impacting your creditworthiness.

To ensure you stay within your credit limit and avoid penalties, consider these strategies:

· Monitor your spending: Keep track of your purchases and account balance regularly. Most banks offer mobile apps and online platforms that make it easier to stay on top of your spending.

· Set alerts: Many credit card issuers allow you to set up notifications to alert you when you're nearing your credit limit. These alerts can serve as a useful reminder to curtail your spending before the over-limit fee kicks in.

· Opt out of over-limit transactions: Some credit card providers let you choose whether you want to allow transactions that exceed your limit. By opting out, your card will be declined if the purchase amount goes beyond the available credit, preventing any additional charges.

· Make payments throughout the month: Instead of waiting until the end of the billing cycle, consider making multiple payments during the month. This can help keep your balance well below the limit, reducing the risk of over-limit charges.

· Request a credit limit increase: If you consistently approach your limit, you may want to request a higher credit limit. But ensure that your financial situation supports such an increase, as this can prevent you from hitting the limit in the future.

Keeping track of your credit card limit and avoiding extra charges can help you stay financially healthy. With a few simple steps, you can continue to enjoy the benefits of credit cards without falling into the trap of over-limit fees.