All Credit Cards have varying limits depending on the bank and the cardholder’s credit history and score. This limit is designed to help you manage your borrowing responsibly.
However, if spending goes beyond the approved limit, it can lead to certain charges or restrictions from the bank. Understanding what happens in such situations can help you use your Credit Card more carefully and avoid unexpected issues.
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Things that happen when the credit limit is exceeded
Over-limit fees
Banks may charge an over-limit fee when cardholders exceed their card limits. This fee can vary based on the bank and is a percentage of the over-limit amount.
For example, if you exceed your limit by ₹500, some banks may charge an over-limit fee of around 2.5%. In addition, GST of up to 18% could be applied, which can make the total cost higher.
Increase in debt-to-limit ratio
The debt-to-limit ratio is the ratio of the credit being used to the total credit limit of the buyer. It is also known as the credit utilisation ratio in some cases. Ideally, cardholders should maintain a credit utilisation ratio of 30%.
But when they go overboard with their spending limits, the credit utilisation ratio can reach 100% or more. This high ratio leads to a negative impact on their overall Credit Card history.
Decline in credit score
A high credit utilisation ratio of 100% or more can lead to a decline in the credit score. A lower credit score can make it harder to get new Credit Cards or loans in the future.
Tip: When you plan your spending, make sure to manage your balance carefully if you intend to apply for a Credit Card in the future, so your utilisation ratio stays healthy.
Excess interest
Using a Credit Card beyond its limits leads to extra interest being charged by the bank. The interest rate varies depending on the bank and the card type. This interest is applied to the amount that exceeds your limit and continues to accrue until the excess is paid off.
Card suspension and decline of transactions
Some banks might suspend the card entirely or prevent the cardholder from performing daily transactions. Although this is not very common, it may occur if the credit limit is repeatedly exceeded or if the over-limit amount is significant.
In such a situation, cardholders may immediately contact their bank and clear the excess payment.
How to avoid exceeding the credit limit?
Convert a large purchase to EMIs
Many cardholders use their credit cards to buy high-value items such as smartphones, TVs, or other electronics. Converting these purchases into EMIs can help manage your credit limit more effectively.
Maintain CUR below 30%
Cardholders should ideally maintain a debt-to-limit or credit utilisation ratio of below 30%. So if their credit limit is ₹1,00,000, for example, you should not spend more than ₹30,000. That will ensure that they have enough credits for the future when required.
Set up alerts for your account
You can set up transactions and balance-related updates for your Credit Card account. This will help you keep track of the expenses and avoid going over the credit limit.
Conclusion
Using your Credit Card responsibly helps you avoid extra fees, high interest, and potential restrictions. By planning your spending carefully, you can protect your credit score, make the most of your card, and ensure your credit remains healthy for future needs, including when you decide to apply for a Credit Card.