Well, we all love the convenience that credit cards bring along with them. Because of the benefits that credit cards provide, they have become a part and parcel of our life. Credit cards can be used for each and every small or big purchase that we make in our daily life. They also provide us with the facility of purchasing products bearing high amounts and later paying for them in the form of Equated Monthly Instalments (EMI). Additionally, they also provide cardholders with various other rewards and benefits because of which they have become quite popular in today’s era.
Now owning a credit card is one thing, and utilizing the card optimally is another thing. A cardholder has to be very careful and cautious while he is using a credit card and while repaying the credit card bills. The credit card that the company issues comes with a pre-defined credit limit, i.e., the customers have to use the credit card within that described limit, but what happens if you overuse your credit card limit?
What is a credit card limit?
- A credit limit is a maximum amount that a credit card company offers to the credit cardholder on a credit card.
- This limit is generally set considering various factors such as CIBIL Score, monthly income, other liabilities, etc.
- A lower credit limit is given to the high-risk-bearing individuals because they lack the ability to repay the debt and a high credit limit is given to the low-risk-bearing individuals because they have greater flexibility to repay the amount that they spend using the credit card.
Generally, in the normal course of transactions, an individual can use a credit card only up to the limit that has been prescribed by the credit card issuing company and he cannot go beyond that limit. But in certain cases, when the credit card holder is not aware of the amount that he already has spent using his credit card, he tends to present his credit card for another payment (which actually does not have the available balance in it), and gets deducted. Now how did this happen?
What happens when you overuse your credit card limit?
Credit Over-Limit is a situation where a cardholder uses his credit card beyond the specified credit limit. This facility is allowed for all credit cardholders but comes with certain terms and conditions. Though the card issuers extend such facility to the cardholders, it is ultimately the cardholder’s choice whether he wants to continue the transaction with which he might exceed his credit limit or wants to cancel the transaction. Credit over-limit is allowed subject to the following conditions –
- After the amendments were done to the Credit Card Act, 2009, the credit card issuer can charge over-limit fees only if the cardholder has signed to the over-limit protection schemes.
- The card issuer company cannot charge an over-limit protection fee if the cardholder has not subscribed to the said scheme. In such a scenario, the cardholder will not be allowed to avail the facility of making transactions beyond the credit limit of the credit card.
- Also, according to the Credit Card Act, of 2009, the card issuers can only charge a fixed amount on the over-limit amount used through the credit card and the fee amount cannot be more than the overdrawn amount.
Will overuse of credit limit hurt your credit score?
Yes, overuse of credit limits will surely affect your credit score. This is because an individual’s CIBIL Score comprises 30% of the credit utilization ratio. Hence if you overuse your credit limit to a great extent, you will notice a significant downfall in your credit score. This shows your over-dependency on credit for fulfilling your daily needs and also demonstrates that an individual might be in a position of financial crunch.
Suggested Read: 7 Ways to Increase your Credit score
Ways in which it can be avoided in over-using the credit limit
An individual should be well aware of the fact that overusing the credit card limit will attract charges and penalties and also have a decline in the credit score. Below mentioned are the ways that a credit cardholder should adopt so as to remain updated about his credit card usage.
- Set up mobile alerts or email notifications on daily basis to stay updated about your credit card balance and the available credit limit.
- Secondly, if you know that you will have to make a huge purchase using your credit card, make sure that you inform your credit card issuer about the same and place a request with them for enhancing your credit card limit.
- Another option is that pay for your outstanding balance so that you have enough limit available to pay for your future purchases.
Though credit cards have been designed to provide benefits to credit cardholders, it is the responsibility of the credit cardholders to make use of a credit card in a wise manner. Overuse of a credit card should be avoided as it not only attracts charges and penalties but also affects your credit score in a negative way. Hence, if a cardholder suspects a big expense in the near future, either he can request a credit limit enhancement or pay for the current outstanding bills so as to make room for the future purchases that need to be done using the credit card. A cardholder should always keep a check on his available credit limit before initiating any transaction by either setting up mobile or e-mail alerts or by logging in to the phone banking application but over usage of a credit card should be avoided.