Can You Overdraft a Credit Card? What Cardholders Should Know

When you get a credit card, one worry you might have is if you could potentially overdraft on it. For those who already have a checking account and a debit card, overdraft is a term you’ve likely seen come up in your account information. But can you overdraft a credit card?

The short answer to this question is no — because the term “overdraft” only applies to transactions made from your checking account or savings account. However, going over your credit limit can still have a negative effect on your finances. 

Here’s what you should understand about how going over your credit limit is similar to — and different from — overdrafting a bank account, and why you should try to avoid doing this when possible.

What does it mean to overdraft your bank account?

When you overdraft your checking or savings account, it means you have attempted to withdraw or use more money than what is in your account balance. 

For example, if your checking account has $200 in it, and you attempt a debit card purchase of $300, you will overdraft your account. The purchase will leave you with a negative balance. This is because debit card transactions result in direct withdrawals from the linked bank account.

When you attempt to make this type of transaction, there are two things that could happen. If you have overdraft protection on your account, your bank will actually allow you to complete withdrawals that exceed your available balance. However, you will be charged an overdraft fee. The average fee is around $33 per overdraft transaction, and most banks allow between four and 12 overdrafts during a single business day.

After the bank allows the transaction to go through, the overdraft acts similar to a loan or cash advance. You must pay interest on the outstanding balance until you have enough available funds in your account. If the overdrawn checking account is linked to another savings account or line of credit, your bank may automatically transfer money from these accounts to cover the difference.

If you don’t have overdraft protection, the bank will not allow the transaction to go through. You would likely also be charged a non-sufficient funds (NSF) fee. So, if you wrote a check to your landlord for $1,000 but only had $900 in your account, the check would bounce. The transaction would not go through since you have insufficient funds.

Can you overdraft a credit card?

Credit cards operate differently than a checking account that you open through a bank or credit union. When you open your credit card account, you will have a credit card limit that indicates how much you can charge at any given time.

In most cases, when you attempt to make a payment that would put you over your credit card limit, the transaction would be declined; you wouldn’t be able to complete the purchase using that particular credit card. For example, if you have a card limit of $3,000 and you have used $2,900 of your available credit, any purchase over $100 would be declined.

Thanks to the Credit Card Act of 2009, you won’t be charged additional fees if you try to make a purchase and are declined. However, you won’t be able to complete the purchase unless you have another payment method available, such as cash or a credit card with a lower credit utilization rate.

While you typically can’t overdraft your credit card, there are some situations where you could still spend more than your credit limit would normally allow.

What you should know about over-the-limit coverage

Some credit card issuers allow cardholders to opt into over-the-limit coverage. This plan allows you to complete purchases that would put your credit card balance over its established account limit. Credit card issuers will often charge an annual fee if you want this coverage.

While over-the-limit coverage can ensure your credit card doesn’t get declined when you try to make a purchase, it’s generally something you should try to avoid. You may be charged a fee when you go over your limit, and some issuers charge higher fees if you go over your credit card limit multiple times during a six-month period. 

You may be charged this fee again if your balance stays over the limit across multiple billing cycles — even if you are making payments toward that credit card debt.

The practice of over-the-limit fees has become rare in recent years. However, many providers will increase interest rates as a penalty for going over the limit. This can cause your credit card debt to increase significantly — and quickly. 

Lenders could force you to pay your account balance earlier than usual. They might also remove any reward privileges associated with your card or increase your required minimum payment.

All of these changes are designed to motivate you to get your card back under the established credit limit as quickly as possible. If you repeatedly overcharge your card, the issuer might even cancel your account — though you would still be responsible for paying off your debts.

Regardless of what your credit card issuer might do, going over your card limit can have a negative effect on your credit score. Credit utilization makes up 30% of your FICO score, so going over your limit can result in a significant drop. 

Instead of opting into over-the-limit coverage, consider looking into requesting a credit limit increase. Getting a pay raise or maintaining a good payment history will make lenders more likely to increase your limit. Proactively paying down your card balance will also make you less likely to reach the limit.

Alternate payment options can also keep you from reaching the limit. For example, you could have an emergency cash supply to help keep select purchases off your credit card.

In addition, opening a second credit card account will give you more available credit, making it easier to stay below the limit — though you will now need to monitor spending on two separate accounts.

Managing your credit card wisely

While the short answer to “Can you overdraft a credit card?” is no, you should still try to maintain a low credit utilization by paying off as much of your balance each month as possible. This can help you maintain a healthy credit score.

With careful budgeting and close monitoring of your personal finances, you can keep your credit card balances in check while also ensuring you have sufficient funds in your bank accounts for bills and other expenses.

If you need to reduce your credit card debt, consider Tally†. Our credit card payoff app helps you manage your credit card payments. In addition, with Tally’s available lower-interest line of credit, you can pay off high-interest credit cards faster, helping you save money in the long run.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.