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Credit card user paying online

What Happens If You Go Over Your Credit Limit?

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Many Americans use credit cards to pay for everyday expenses as well as emergencies. Many rewards credit cards also help people to earn bonuses. Your credit card comes with a set limit, based on your creditworthiness or likelihood to pay back what you borrow. 

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Going over your credit limit happens for a few reasons, including negligence and emergency expenses. Here's what happens if you go over your credit limit and some steps you can take to avoid this issue. 

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Penalties for going over your credit limit

Two key consequences come from exceeding your credit limit on any credit card. One: you pay a penalty fee to the card-issuing company. Two: your credit scores are likely to drop. 

First, you typically pay a penalty to the credit card company. You must opt in to this, and then your first overcharge will typically cost you a $25 fee, followed by a $35 fee for the second time. This fee cannot be larger than the amount you overspent on your credit limit, per the Consumer Financial Protection Bureau. There may also be a penalty APR increase.

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The second main penalty for going over the credit limit is a likely decrease in your credit score. This only happens if the credit-issuing company reports your overcharging to one of the three credit-reporting bureaus, Transunion, Experian, or Equifax. Checking with your card company to find out when and to whom they report account issues may be helpful. 

What is credit utilization?

Credit utilization refers to the ratio of debt you carry to the total available credit you have. If you have $3,000 in total debt and $10,000 of available credit, that’s a 30 percent utilization rate. It’s recommended to stay below 30 percent credit utilization

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30 percent of your FICO score is determined by your credit utilization ratio. Keeping your utilization around 10 percent is a good goal, because it still shows you can responsibly handle credit. It’s also good to avoid too high of a utilization on any single card.

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Credit scores update at varying intervals. Be patient waiting for scores to change, and check on your accounts to be sure appropriate updates are made. 

How to increase your credit limit

There are two fairly simple ways to increase your credit limit: ask the credit-card company for an increase, or apply for an additional credit card. Both of these can give you more available credit, which decreases your credit utilization and increases the limit so you’re less likely to go over it. 

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Be cautious about opening new card accounts, though. These should not lead to spending more on credit, and you want to avoid opening up multiple new cards in a short time period.

How to pay down a credit card

Aim to pay credit card balances in full each month to avoid interest charges. If that’s not possible, paying it off gradually will still improve your credit utilization ratio and get you on the right track. Decreasing credit card usage can also help prevent further trouble. 

Another tip is to pay twice per month, effectively resetting your utilization rate mid-month. 

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