What You Should Know Before Opting in to Over-Limit Fees

No matter what your credit history looks like, if you have a credit card, you have a credit limit (sometimes called a credit line). Your credit score, employment status and age are just a few factors that could affect your credit limit, which is the maximum amount of money you can charge to your account balance.

While the average American’s credit limit across all cards is over $30,000, an individual credit card could have a limit as low as $300. Generally speaking, your credit card balance can’t go over the limit. However, there are some situations where you may be able to exceed the limit — and this is where an over-limit fee could come into play.

In this article, we’ll discuss over-limit fees and other potential consequences of going over your credit limit. We’ll also cover alternate options if you’re having trouble keeping your balance below the limit.

What is an over-limit fee?

An over-limit fee works similar to an overdraft fee with a debit card when there isn’t enough money left in your bank account to complete the transaction. A credit card company may allow cardholders to go over the established limit for their account, but they will be charged a fee for doing so.

For example, let’s say you have a credit card with a credit limit of $5,000. If your balance is at $4,900 and you make a $200 purchase with that card, it would put you at a balance of $5,100 — or $100 over your credit limit. If your credit card allows over-limit charges, you will still be able to make the purchase, but you will be charged an additional fee.

Why most people don’t have to worry about over-limit fees

In reality, most people don’t have to think twice about over-limit fees on their credit cards. When they try to make a purchase that would put them over the credit limit, the card would be declined. This is thanks to the Credit Card Act of 2009, which was designed to protect cardholders from high, unexpected fees (including over-limit fees).

While over-limit fees are still allowed after the passage of this act, you have to opt in with your credit card issuer to allow over-limit transactions. Not all credit card issuers even give you the option to opt in to this. You’ll have to check your card terms to see if it is available to you.

If you don’t opt in to allow over-limit transactions and fees, your card will be declined every time you try to make a purchase that would cause your balance to exceed the credit limit.

Credit card issuers set their own fees for when you go over your credit limit, so check your card terms for specific details. However, the Credit Card Act of 2009 dictated that credit card companies can only charge one over-the-limit fee per billing cycle, and the fee can’t be higher than the amount you went over your credit limit. This means that if you went over your limit by $7, the max fee you could be charged is $7.

Other risks of going over your credit limit

In addition to over-limit fees, credit card companies may impose other consequences for going over your credit limit.

Common actions include increasing your minimum payment, raising your annual percentage rate (leading to more expensive interest charges), reducing your credit limit and moving up the due date of your billing cycle.

In addition, carrying a high credit card balance can negatively affect your credit utilization, which is a contributing component of the credit scoring factor of amounts owed. For example, if your total credit limit is $10,000 and you have total balances of $9,500, that means your credit utilization is 95%. Most experts recommend keeping your ratio below 30%.

If a high ratio causes a drop in your credit score, you may have trouble getting approved for lending or for the best loan terms.

What you can do instead of opting in to over-limit fees

Rather than opting in to over-limit transactions and fees, your better option is to request a credit limit increase for your credit card. Even increasing your available credit by a few hundred dollars can reduce the likelihood of having your card declined or getting an over-the-limit charge. A higher limit also means that even with the same total balance, you will have lower overall credit utilization, which may positively affect your credit score.

Your card issuer is more likely to increase your credit limit if you have a history of making credit card payments on time. They might also consider your income and whether you have a good credit score.

Because your income can play a role in your credit limit, one of the best times to ask for an increase is after you get a raise. Whether you get a new job or start a side hustle, reporting your updated annual income to your credit card company increases the likelihood of a credit limit increase getting approved.

Alternatively, if you aren’t eligible for a credit limit increase, you could open a new credit card account. Even if the secondary credit card has a relatively low credit limit, this will still increase your total available credit. By using both your old and new cards to make purchases, you can avoid going over the limit on a single card. 

You could also do a balance transfer to a new credit card that offers a higher limit than your existing card. This way, you’ll have more available credit, but only one card payment to worry about.

Understand your credit limit to improve your finances

Even though over-limit fees are rare nowadays, it is still important to keep your account balance well below the credit limit. This reduces the likelihood of having your card declined when trying to make a purchase, of having a high credit utilization and of being unable to manage your credit card balance.

Regardless of your total credit limit, credit card debt can become a serious challenge that negatively impacts your personal finances. Fortunately, the Tally† app can help. Tally offers a lower-interest line of credit that combines your higher-interest credit card balances into a single bill that makes it easier to pay off your debt quickly.

†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.