What is a Credit Card Over-Limit Fee? A Guide to the Penalty Charge

Going over the limit may seem like a good option in certain situations. Maybe that car in front of you is driving a little slow and you need to speed up to pass them. Or you take an extra few bites of that dessert, even though you promised yourself you wouldn’t. We’ve all been there, or at least I have. 

In the credit card world, pushing the limit isn’t nearly as gratifying because it can cost you money. When credit card users spend over their card’s limit, credit card issuers may charge an over-limit fee as a penalty. 

Just like going over the speed limit can get you an expensive speeding ticket, going over your credit card limit can result in an over-limit fee.

Maxing out a credit card can lead to over-limit fees if you aren’t cautious. Checking your limit and understanding how much you spend with your card can help you avoid this mistake. In this article, I’ll give you all the information you need to find out if your credit card charges over-limit fees and how to easily avoid them. 

Like most things in finance, an over-limit fee has rules. But in this case, the rules actually favor the consumer. So one point for us! Although credit card companies can charge the penalty, they must follow specific regulations in how they deliver it, helping us avoid over-limit fees altogether. 

Why Over-Limit Fees Exist

Over-limit fees exist to protect credit card issuers from risk. This is one of many credit card fees that issuers employ to manage risk and cardholder behavior. 

Before credit companies started using over-limit fees, they would decline any transactions that cardholders made over their card limit. Over-limit fees introduced a new method, which allowed over-the-limit transactions but included a fee. 

Some credit card issuers allow you to spend more than your credit limit, but charge you an over-limit fee. Other issuers simply decline transactions that will put you above your limit.

Including an over-limit fee enabled card companies to address cardholder behavior by providing a penalty for unchecked transactions. It also generated additional revenue for issuers.  

Understanding the consequences of over-limit fees can help cardholders improve their financial management and avoid paying extra money that they clearly don’t have. 

Common Causes of Over-Limit Fees

Over-limit fees can happen due to a myriad of reasons. It’s not always a purchase playing the culprit role. Purchases, interest charges, late fees, and other fees can all cause a cardholder’s balance to go over their credit limit, resulting in an over-limit fee. 

If the timing of your payment is off, this can also cause you to incur late fees. This can spell bad news for a cardholder nearing the threshold of their card limit. In this case, late fees can affect your over-limit status and cause you to pay another fee. 

Today, cardholders are rewarded for using their credit cards for every purchase through cash back and other perks. But without proper financial management, common transactions can lead you to spend over your limit threshold. 

Always know where your balance is in relation to your credit limit so a late payment or a large purchase doesn’t cause you to exceed it.

According to a recent study, nearly two in five survey respondents shared that they spend more than their budgets allow when online shopping. Online purchases offer an ease of shopping like never before, but if not managed properly, they can lead to overspending. 

Larger purchases, such as airplane tickets and appliances, can also drive up your balance quickly and may require careful review before running your card. Smaller transactions, including streaming services and subscriptions, could also cause damage if you lose track of them in your budgeting. 

Cardholders with lower limits may have to proceed with even more caution. Exceeding a lower limit can be easily done, even with everyday purchases. Yes, going over the limit may provide short-term benefits but can also have long-term consequences.

Fee Caps and Restrictions

The Credit CARD Act of 2009 drastically changed the regulation of over-limit fees and how card issuers can use them to manage risk. Legislators designed the CARD Act to protect consumers from card issuers’ unchecked and abusive practices. 

Before the CARD Act was passed, credit card companies could charge consumers high fees whenever they exceeded a card limit. The credit card issuer held the right to determine the fee’s value. 

So that meant a card company could charge a cardholder a fee greater than the amount by which the customer exceeded their credit limit. Another caveat: Cardholders were automatically enrolled into over-limit coverage programs whether they wanted to or not.

The Credit CARD Act of 2009 introduced fee caps and restrictions to give consumers their financial security back. It required card companies to give users the option to either opt-in or opt-out of over-the-limit coverage programs.

Cardholders now have the choice to opt-in in exchange for the power to exceed their limits. Besides this regulation, the CARD Act also enforced a fee cap. Card companies are not allowed to charge consumers a penalty exceeding the amount they went over or charge more than once in one payment cycle. 

For example, if you spend over your limit by $20, a credit card issuer can only charge a penalty in the amount of $20. However, another limitation was introduced in 2021 to further help the consumer. 

According to the Consumer Financial Protection Bureau, the first over-limit fee a credit card company issues cannot exceed $27, and the second penalty can’t be more than $38 if it is incurred within six months of the first fee. 

Over-limit fees are only incurred when a cardholder exceeds their card’s limit. But staying below your balance threshold isn’t the only way to avoid them. I’ll examine how monitoring your card usage and other tactics can help you avoid these pesky fees altogether.  

Monitor Your Credit Card Usage

Managing credit card usage can be tricky. If you don’t keep a watchful eye on your cards, you can end up using them to spend too much and pay more on your next bill payment. 

The first step to better credit management is monitoring. It may seem simple, but consistency is key here. Integrating regular account checkups into your financial routine can help you keep track of your balance and keep your spending in check. 

When checking your account, consider your balance threshold and how close you are to it before making a purchasing decision that may include your credit card. Also, pay close attention to your payment due dates. 

Since late fees can affect your over-limit status, try to pay on time every cycle so you won’t incur any unnecessary penalty charges that can drive your balance over the limit. 

But slip-ups happen. That is why setting alerts can be a game changer. Banking alerts allow users to stay aware of their spending habits and any suspicious activity. Credit card notifications do the same. 

Credit card alerts can help users maintain and use their credit responsibly — and as a result, avoid over-limit fees. The top three notifications to set up include: 

• A bill-due notification notifies users that their payment due date is nearing. This alert is ideal for cardholders who prefer to opt out of automatic payments.
• A balance notification is perfect for big spenders and cardholders with low limits. It alerts users of when they are getting too close to their balance threshold. Some apps allow users to customize their notifications to alert them when their balance is within a certain dollar amount.
• A spending notification can alert cardholders of every purchase they make. Depending on the credit card account, users can receive notifications for every purchase or only purchases that exceed a specified amount.

Thankfully, setting up alerts is easy. The process only consists of four steps for most apps. All you have to do is download your credit card issuer’s app, log into your account, navigate to your settings or user preferences, and select the notifications you want to set up. And you’re all set.

Budgeting and planning are also lifesavers. We all have had our fair share of unconscious spending. It has happened to me more than I count. You may pay for something and, by the end of the month, have completely forgotten about it.  But unfortunately, the impact is still there. 

Modifying your budget can help you avoid fees and prevent certain purchasing behaviors. You can plan for larger purchases in a monthly budget and review your balance to ensure you can make specific financial decisions without going over your credit card limit. 

Strategies to Prevent Exceeding Your Limit

As I noted above, the Credit CARD Act of 2009 eliminated the mandatory enforcement of over-limit fees. Users can no longer be subjected to over-limit fees unless they want to enlist in an opt-in program. 

Using your opt-out option can allow you to avoid over-limit fees altogether. Instead of incurring a penalty charge, cardholders will have any transaction above their balance threshold declined. This way, credit card companies can manage risk and users can be protected from unwanted fees. 

Owning multiple credit cards can also help you stay within your credit card’s bounds. According to Experian, the average American has four credit cards, which allows more credit spending power and reward benefits. 

Using more than one credit card can help you avoid maxing out. This strategy works because you can use different cards for different purchases, instead of overloading one card.

If you have a low credit limit and find yourself getting close to it often, consider requesting a credit line increase.

Another way cardholders can prevent exceeding their card limit is to request a credit limit increase. This method may not work for everyone, but it is worth the shot. Raising your credit limit provides access to more credit, subsequently preventing you from going over your limit too easily. 

This strategy can help consumers with lower credit limits achieve more without worrying whether every little purchase will drive their account over their balance threshold. But how do you request a limit increase? 

You can request an increase by applying for one online or calling a representative. Note that this process may include a hard inquiry, which can impact your credit report and score. If you are eligible, depending on your credit card issuer, you may be approved automatically. 

Over-limit fees don’t only lead to short-term consequences. They can also prompt long-term impact, harming your expenses and financial responsibility. 

Financial Consequences

You may already be on a tight budget but over-limit fees can lead you to bust it even more. Every over-limit fee charged increases your monthly credit bill payment, upping your balance and making it more difficult to pay off. 

Although credit card companies can no longer charge multiple penalty fees within one financial cycle, these fees can add up in the long run if you’re not careful. 

Exceeding your credit card limit can also result in other penalties. These penalties could include increased interest rates, decreased credit card limits, higher minimum payments, and a dropped credit score. Your credit card company could even cancel your card. 

Credit card issuers can also hit you with a penalty APR, an interest rate that is significantly higher than your regular one. Penalty APRs can take months to revert and are terribly expensive to deal with. They basically serve as a punishment to make consumers adjust their credit spending behavior. 

Consumers can face penalty APRs for more than six months, leading them to pay much more on additional interest than previously due.  

Potential Credit Score Implications

One of the most negative effects over-limit fees can produce is a credit score reduction. Going over your card’s limit can lead to a drop in your credit score which can take substantial time to repair. 

In fact, your credit score decreases once your exceeded balance is reported to the credit bureaus. Why does this happen? Well, this is where your credit utilization ratio comes in. 

The rule of thumb for a good credit utilization ratio (i.e. the amount of credit you use compared to your overall credit limit) is only 30%. This ratio is a part of your credit utilization calculation, which accounts for about a third of your credit score. 

So you can see why overspending can affect your credit score. You can also see your minimum payments increase, making it more difficult to complete your payments on time, which can also affect your credit score.

Staying within your credit line can help you build a stronger credit score and report. In the long run, less negative impact on your credit report will allow you to receive better financial opportunities with better terms and conditions.

With the passing of the Credit CARD Act, you have the option to completely eliminate the possibility of over-limit fees. Those who agree to participate in an over-the-limit coverage program can exceed their limits. But this power can come with consequences. 

By avoiding over-limit fees, you can protect your credit scores and finances. I recommend opting out of over-the-limit coverage programs and living within your means so you can avoid penalties, such as increased interest rates and credit card cancellations. Staying within your credit balance thresholds can make a world of difference for your long-term financial goals.