Friday, January 23, 2009

Does Being Over the Credit Limit Hurt Your Credit Score?

Carrying a credit card balance that exceeds your credit limit hurts your credit score. It suggests you are having financial problems, especially if several of your accounts are maxed out. Your credit score will suffer each month as accounts continue to report as over the limit. Other creditors will see this if you apply for new credit, making approval difficult or even impossible, even in an emergency.

Considerations

    Maxed-out credit cards are a huge drag on your credit score, although no one can say exactly how much they hurt. Individual credit situations are different and people with higher credit scores are likely to lose more points than people with poor scores. Paying your bills on time while keeping balances low are considered the most important factors for maintaining a good score.

Fees

    Allowing accounts to remain over the limit causes fees to be applied each month, increasing the balance even more. The card company may also increase your interest rate as it views you as more of a credit risk. A snowball effect can ensue with fees and additional finance charges pushing you deeper in debt.

Solutions

    Paying down balances will end the fees and repair damage to your credit score over time. Try making biweekly payments if you cannot pay a large lump sum. Paying every two weeks allows you to make 26 payments in a year instead of 12 when paying monthly. Paying at least the minimum payment on a biweekly payment plan also means your payment will never be late.

Help

    Also call your credit card companies and ask for help getting back under your limit. You may find that the company has programs available to help you. For example, the company may agree to lower your interest rate for a short period, allowing more of your biweekly or monthly payments to be applied to the principal. Stay with it as the balances drop. Set a goal of paying down all of your revolving debt to no more than 10 percent of the credit limit. Keeping debt at that level while making timely payments will help your score.

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