Monday, March 12, 2012

The Risk of Being at or Over Your Credit Limit

When you reach or go over your limit on a credit card, it is usually a red flag to creditors and presents risks concerning your credit account. It should also serve as a major red flag to you as the account holder. Be aware of these potential risks and make every attempt to avoid getting into this situation.

Over the Limit

    When you go over the credit limit, the amount of your charged balance exceeds the available credit limit extended by the creditor. The credit limit is the amount that the creditor has determined is the maximum you can afford to borrow at that point in time. When you reach or exceed that maximum, it is an indication that you are overextended or overwhelmed by your credit obligations.

Potential Risks

    One of the most concerning risks of reaching or going over your credit limit is that it could put the card account in less than good standing. Exceeding the limit could potentially throw the account into a default status. A number of creditors have eliminated over-the-limit fees, but some creditors might still charge over-the-limit fees if you do not opt out of the ability to go over your spending limit. Some creditors might decide to close the account or lower the credit line due to repeatedly exceeding the limit. Both actions would negatively affect your credit score. Reaching the limit but not going over still results in a high debt utilization ratio (used credit divided by available credit). Generally, the higher the debt utilization ratio, the lower the score.

30 Percent Rule

    The general rule of thumb is that your debt balance should not exceed 30 percent of the available balance. When your debt utilization ratio exceeds this amount, your credit score could start taking a hit. So if your card limit is $1,000, do not use more than $300 of that limit at any given time. In fact, strive to maintain a balance of zero. If you're already over 30 percent, cut up the card, at least temporarily and start putting extra money toward your balance over the minimum payment each month.


    It is important to monitor your credit card account as frequently as you use it for purchases. Set up email alerts to notify you when you are approaching the credit limit. Also, while some creditors may agree to raise the credit limit, getting that close to the limit is an indication that you are not managing your credit card account responsibly. Consider a debt payoff plan instead and tighten up your budget to avoid using credit.


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