Credit Cards are very useful and convenient, be it for shopping online or offline, for paying bills, insurance or for the reward points and partnership deals that come along. It also acts a temporary means of sailing through shorter periods of credit crunch too.
The utilization of a credit card is very easy especially with the advent of Contactless Credit Cards. However, at the same time, you should be aware of all the charges and interest that come along with your card. This is necessary so that you can make use of the card in the best way and safeguard yourself from the unnecessary charges and expenses.
We at CreditMantri have always tried to make concepts around the usage of credit cards easier for your understanding. Earlier we spoke about how interest on your credit card work. In this article of ours, we will try to throw more light on one of the most important fees that is charged on your credit card, i.e. the Card Over Limit Fee.
What is Credit Card Limit?
You might have been in many instances where you wanted to use your credit card for a big-ticket purchase transaction but refrained yourself as you were not sure if the amount would be well within your credit limit. Each credit card comes with an upper limit for spending in a billing cycle. This is called the Credit Limit. A credit limit is set on your card when it is issued. The limit is set based on your credit score, your income and other factors like the amount of debt already held by you. The policies set by the bank also matter here.
The credit card issuer or the bank wants to ensure that the amount spent by you is well within your capacity to pay back, hence the credit limit.
The credit limit can be increased or even decreased after the issue of the card based on your spending, repayment pattern and other policies as decided by the issuer. If you been prudently paying back all credit card outstanding bills on time and using your credit card within the limit, you may be given an option to increase your credit limit. You can exercise your choice.
What Happens When You Spend Beyond Your Credit Limit?
As we have learned, every card comes with an upper limit for spend set on it. Have you wondered what would happen if you wanted to spend an amount above your credit limit? Will the transaction go through if it is above your limit or will the transaction be rejected?
It may be dependent on the kind of credit card that you may be having.
For some credit cards, the transaction may go through but you will be charged a fee on over usage
Certain credit cards may not allow such transactions and it will be rejected.
What is Credit Card Over Limit Fee?
The fee that is charged by the credit card issuer/ bank when the usage exceeds the credit limit is called the Overlimit Fee. It is set to avoid unnecessary hassles and embarrassments to the user while completing a transaction. Imagine you are utilizing your credit card in an emergency situation and you are in desperate need to see the payment go through. If the transaction is rejected, then it might create more problems for you.
That is why the bank allows the transaction to go through and then later charge a fee. This allows the user to be in charge of the usage. The amount charged for this the Credit Card Over Limit is specified in the Terms and Conditions booklet that was sent along with card or even available on the website of the Card Issuer.
Here are some examples:
HDFC Bank Credit Card Over Limit Charges
Over limit charges are applicable on the total outstanding amount exceeding the Credit Limit at the rate of 2.5% of the over limit amount subject to a minimum of Rs 500.
Citibank India Credit Card Over Limit Charges
2.5% of the amount (excluding fees, charges, and taxes) over the credit limit, subject to a minimum of Rs 500.
Going by the charges mentioned on the websites of the various banks that issue credit cards, it is evident that even a spend of Rs 10 over the credit limit will incur in credit over limit charges. If your credit limit is Rs 1 lakh and you spend Rs 1.25 lakhs in a billing cycle, then your will have to pay an overlimit charge of 2.5% on Rs 25000. Typically on all these extra charges, a GST is also charged over and above the interest.
Additional Reading: How to manage credit card spends?
How does Credit Card Over Limit Fee Affect Your Credit Score?
You might have a doubt in your mind on if paying a credit card over limit fee will it end up affecting your credit score and if it will be reported to the credit bureau. A payment of credit card over limit fee will not be reported to the credit bureau and it will not affect your credit score.
However, there is another facet to the Over limit Fee that you should be mindful of. If you have paid a over limit fee, it is clear that you not only used the entire credit limit but also overshot it. This shows that your credit utilization has gone higher.
Experts advise a credit utilization limit of below 30%, i.e. you should utilize only up to 30% of the set credit limit during each billing cycle. Doing this will portray that you are responsible with your card usage and hence, improves your credit score. While on the other hand, credit utilization over the limit is clearly not a good indicator of credit healthy behavior. One odd instance of Over Limit may result in a small dip in your credit score but when used frequently will result in major effect on your credit score.
Additional Reading: How can you lower your credit card utilization ratio?
How Can You Avoid Credit Over Limit Fee?
As your credit coach, CreditMantri brings some simple tips to avoid credit over limit fee.
#1. Know your Card Well: It pays to clearly understand the fee and charges levied by your card issuer so that you can be aware of the consequences.
#2. Beware of your Credit Card Limit: This is an important figure every credit card user should be aware of so that you know when to stop utilizing the card.
#3. Opt for balance updates: You can subscribe to balance updates from your credit card over SMS or an email to know your transactions and the remaining balance after each transaction.
#4. Plan your Spending on the Card: It is good to draw up a budget on your credit card spending so that you can avoid overspending.
#5. Check with your Bank if you can opt out of Overlimit Fee: If you feel you have a tendency to overspend on your card, you might want to opt out this fee and instruct your bank to disallow transactions beyond your limit. Talking to your bank in this regard will be helpful.
Credit Card Overlimit fee may not seem much, but it good to know that it might have other repercussions such as spike in credit utilization ratio and a drop in credit score. Rather than incurring extra fee and charges; it is always good if you can have a clear budget on your card spending.