By John Campbell
Going above your credit limit on any of your available lines of credit could be a very costly mistake.
Many consumers aren’t even aware that a credit account can be overdrawn. What you don’t know can hurt you. The penalties can go far beyond the typical overdraft fees you’ll pay with a bank account. Overdraw a line of credit and you may be slapped with a $29 - $35 over-the-limit fee for each overdrawn transaction.
Over-the-limit fees may be only the beginning of your problems if you overdraw a line of credit. Your account could be frozen until you pay off any balance above your credit limit. If you can’t pay off your entire over-the-limit balance before your next payment due date, your account could be sent to a collection agency and your credit score could also be significantly lowered. Even if your account isn’t sent to collections you’ll have a hard time paying off your over-the-limit balance if you normally pay only the minimum required monthly payment every month. Your minimum monthly payment may not even come close to paying off your overdrawn balance.
Worst of all, the interest rate you pay on an account with even one transaction over your credit limit could rise as high as 29 percent. Your monthly interest rate could skyrocket. Even with only a few thousand dollars of debt you may have a very hard time paying off your principal balance owed at a 29 percent rate.
You’ll want to check the terms and conditions for each of your lines of credit to find out what the consequences may be for going over your credit limit. On some accounts, any transaction that will go above your established line of credit will simply be declined. Some creditors will also extend your line of credit to cover any overage if you’re considered a preferred customer. Regardless of the potential consequences it makes good financial sense to keep your outstanding balances low.
Ideally, you’ll want to use no more than 20 - 30 percent of your available credit on any of your available lines of credit. The fewer lines of credit you have the greater your chances will be of nearing your credit limit, however. The closer you may get to your credit limit the more you’ll want to keep an eye on every single transaction to make sure you don’t go over your limit. If you regularly check your e-mail you can request for e-mail alerts notifying you if any transactions bring your available credit close to the limit.
If you’re worried that you may go over your limit you can call any of your creditors and ask for an extended line of credit. You may be surprised at how willing a creditor may be to work with you if you have an excellent payment history. The worst they can do is say no. If your request is denied you should request that your available credit stands as is. If your creditor agrees to this request no transactions will be approved that go over your credit limit. The alternative won’t be a pleasant one.
Even if you’re in a bind and need to use some extra credit now, it’s not worth going over your credit limit. If you need access to additional credit but can’t get your credit limit lifted on one of your credit accounts, you should just apply for a cash advance. The fees and any interest rate hike could cost you far more with one of your credit accounts than with any cash advance.
Going over your credit limit is just too risky for your credit score and your finances.
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John Campbell is the writer and editor of CashBuzz, A financial portal for the rest of us. Check out cashbuzz.com for the latest articles on money management and tips and tricks that can help improve your finances. This article may be reprinted on your Web site if the copyright, author information and active link are included.
