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There are several moving parts to a credit card account, not the least of which is the credit limit. An individual’s credit limit is the maximum line of credit extended by the credit card issuer or lender. A credit card with a credit limit of $5,000 gives the card holder the ability to spend up to that amount either in a single transaction or through multiple charges.
Interest accumulation each billing cycle plus new purchases reduce the total credit limit each period. Most credit card issuers give some leeway on the credit limit for the most qualified cardholders, but others see the credit limit as a hard number that cannot be exceeded.
What Happens If You go Over Your Credit Limit?
Nearly all credit card issuers are required by law to give account holders the option to have transactions that would put them over their credit limit approved or declined. The ability to opt in or out of this over the limit protection can be done directly through the card issuer, typically at no charge.
Having over the limit protection on a credit card does not mean a card holder has unlimited spending all of a sudden; there are still restrictions as to how far over the limit a card may be used for new transactions. For instance, the first purchase that pushes a credit card balance over the limit may go through, but subsequent purchases may then be declined. Each credit card issuer has set limits on this provision, detailed in the card holder agreement.
Circumstances When Over the Limit Spending is Allowed
For card holders who have opted into credit limit over spending protection, the card issuer allows a transaction to go through without a decline at the point of sale. However, future transactions may be declined until credit becomes available due to payment on the account.
There are some credit card issuers that allow over the limit spending without restrictions. The Chase Sapphire Preferred credit card assigns an initial credit limit but gives card holders permission to spend above the limit on a case by case basis. Similarly, most American Express credit cards are actually charge cards, in that they have no pre-set credit limit. Each of these cards requires steady, verifiable income, strong credit history, and no negative credit marks to qualify.
Penalties for Going Over
Many credit card issuers have eliminated the fees typically charged with going over one’s credit limit, but there are a handful that still assess a penalty. When a card issuer does charge an over the limit fee, it cannot exceed the amount that a card holder has gone over his or her limit. While this limits the cost of overspending, there may be additional charges and consequences for card holders who go over their limit.
A penalty interest rate may apply which increases the interest rate charged on new transactions or the entire balance remaining unpaid. The credit card’s minimum payment may also increase when overspending takes place. The most pressing penalty is a potential hit on one’s credit report, as overspending is a sign that a card holder is not able to manage an available credit line responsibly.
Author: Jeff Gitlen
Jeff Gitlen writes about a wide range of finance topics including everything from student loans to credit cards to small business financing. Jeff's work has been featured on a number of sites including Bloomberg, CNBC, Forbes, Market Watch, and more.