What is a credit card over limit facility? Benefits, risks, and how to use it
While it is possible to exceed your assigned credit limit, also known as the credit card over-limit, consequences may stem from doing so. Continuing to maintain financial health relies on understanding what that means, the costs to you, and how to manage that responsibly.
The goal of this article is to provide a complete discussion of over-limit situations, their costs, and protections for your credit score as recommended.
What is an over-limit on a credit card?
When your credit card spending or outstanding debt exceeds the limit set by the credit card company you have an over-limit. For example, if your balance is ₹1.05 lakh, and your maximum is ₹1 lakh you have exceeded your limit by ₹5,000. Over-limit situations occur for a variety of reasons ranging from late payments, inability to anticipate fees, or normal scheduled debits such as EMIs or subscriptions.
Why do banks allow over-limit transactions?
- Customer convenience: To prevent merchant denials on last-minute purchases.
- Possible revenue: Interest and fees on the amount in excess of the limit can add up.
- Credit continuity: Even with a higher cost ensures access to credit at all times (your account doesn’t become inoperable).
Most issuers permit over-limit transactions only when you have opted into the feature and maintain a good credit profile.
Fees and charges of credit card over-limit
This is what you may find:
- Over-limit charge: When your balance is over the limit you will have a charge of a one-time fee, generally between ₹500 and ₹750.
- Higher interest: Interest can be charged at a higher rate over the total balance owing, and over the excess.
- Effects of GST: The cost is slightly higher since all fees attract 18% goods and service tax.
Impact on your credit utilisation ratio
An over-limit incident brings this ratio to 100%, communicating to the agency and yourself you are experiencing financial difficulty, leading to a decline in your score. Recurring incidents have a long-term effect, but progressive bill payment can reduce the impact.
How does over-limit affect your credit score?
The negative impacts of credit card over-limit on your credit score will be:
- Temporary impact: You could lose between 20–50 points for a single over-limit incident.
- Long-term impact: Recurring over-limit incidents indicate to lenders that you rely on their credit.
- Report history: Some bureaus note your occasional over-limit incidents, impacting future approvals.
Best practices to safeguard against over-limit
- Opt for over-limit notification: If you want to stay ahead of the game, elect to receive notifications when usage reaches 80-90% of the limit.
- Choose not to opt in for over-limit facility: If you are tempted, either through your banking app or customer service, trigger the over-limit facility off on your credit card.
- Review your statement regularly: There is no excuse for penalties and unexpected excess charges when there is early detection.
- Set alerts for subscriptions and EMIs: Regular expenses may also work in your favour, so keep a lookout.
When might it be useful?
Even if it’s not a good option there are some instances in which it can make sense to push yourself:
In conclusion, the credit card overlimit feature offers temporary relief, but it can sometimes carry a high price. If used responsibly and judiciously, this option could be a valuable financial backup. However, overusing this option could adversely affect your reputation, and your overall financial health.
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Disclaimer: Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
