So put me on a highway
And show me a sign
And take it to the limit one more time
-- The Eagles, "Take It to the Limit"

What happens if you go over your credit limit? Does exceeding it mean stores will decline your card when you want to spend? Will your credit rating suffer? Will you be charged a fee, and how much of one? Here's a review of what a credit limit means -- the definition, and what happens after you exceed it.

corkboard with sign posted on it that ways, "now what?"

Image source: Getty Images.

What does a credit limit mean?

Any credit card issuer will be happy that you have their card in your wallet, and they'll want you to use it. And they'll be happy if you take your time paying off your balances, because then they can charge you interest. What they don't want, though, is for your debt to get too out of hand -- because they do naturally want you to pay back everything you owe, eventually. So they impose a credit limit on your card, reflecting the maximum that they're interested in lending you.

Credit limits will vary by lender and by borrower. The limit you're given will be influenced by your credit score and credit history. If, for example, you consistently pay your bills on time, your lender may one day inform you that it has raised your credit limit.

What happens if you go over your credit limit?

So what happens if you do go over your credit limit, or try to -- if, for example, you hand a cashier a card to spend a sum that will push your balance over that maximum? Well, there are several possibilities. One is that nothing dramatic will occur. Your card will be accepted, the transaction approved, and you'll go on your merry way. Your lender may just let it go, as some do at their discretion.

Alternatively, you might find that your transaction is approved, but you're slapped with an over-limit fee. Credit card companies still happily rake in a lot of profit from penalty fees -- some $12 billion in 2016 alone. You're especially likely to get hit with such a fee if you've opted into a plan that specifically gives you the option of putting through over-the-limit transactions with the understanding that you'll face a fee each time you do so. The fee is likely to be as high as $25 or $35, depending on whether it's a first or subsequent offense -- and depending on how much you exceeded the limit by. If you exceeded your limit by $10, the fee probably won't be more than that.

You can opt out of such plans in order to ensure that you don't get socked with those fees. But that makes this last possibility more likely: If you try to spend your way above your credit limit, your card may be declined -- simple as that.

Once you've crossed your limit, you might find that your lender decreases it, further reining in your spending. The lender might also require more than the usual minimum payment on your next statement, too -- requesting you pay enough to get you back under your limit. And an extra-bad possible outcome is that they may hike your interest rate -- significantly. If you tend to carry revolving debt, that is, in effective, an ongoing penalty.

torso of man in suit with arms crossed. to one side is an arrow and the words "bad credit" to his other side another arrow pointing in the other direction and the words "good credit"

Image source: Getty Images.

Don't go too close to the limit -- or your credit score can suffer

It's important to understand that for best results in your financial life, you actually want to stay far away from your credit limits. Being too close to it -- having charged so much that your balance owed is in danger of exceeding it -- is risky. But actually, even carrying a balance that's only 50% of your credit limit can be problematic.

Lenders like to see you owing no more than about 30% of the total sum that you could owe, in other words, about 30% of your total credit limits. If you approach a lender about getting a mortgage, they will check your credit score, which is substantially influenced by how much you owe. Here are the components of the widely used FICO score:

Credit Score Component

Influence on Credit Score

Payment history

35%

How much you owe

30%

Length of credit history

15%

New credit

10%

Other factors such as your credit mix

10%

Source: myFICO.com. 

Thus, keeping your spending in check can help keep your debt in check -- which can improve your credit score. And if you're rewarded for that higher FICO score with higher credit limits now and then, that can boost your credit score further. It's simple math: If the total you can borrow on all your credit cards is $12,000 and you owe $4,000, your credit utilization ratio -- how much you owe of how much you could owe -- is 33% ($4,000 divided by $12,000). if your total credit limit rises to $16,000 and you still owe a total of $4,000, then your credit utilization ratio falls to 25%, a figure lenders will smile more broadly at. (Note that you can always ask a credit card issuer to increase your limit. If you've been a reliable customer, you may get your wish granted.)

So what, exactly, is a good or bad credit score, and how much does it really effect your financial life? Check out the next two tables. First, here's what good and not-so-good credit scores look like, per the folks at the Fair Isaac Corp.

FICO Score Range

Rating

800 and higher

Exceptional

740-799

Very Good

670-739

Good

580-669

Fair

579 and lower

Poor

Source: MyFICO.com. 

Next, the table below shows typical annual percentage rates (APR) and mortgage payments for someone borrowing $200,000 via a 30-year fixed-rate loan. You can see what a significant difference your credit score makes:

FICO Score

APR

Monthly Payment

Total Interest Paid

760-850

3.449%

$892

$121,266

700-759

3.671%

$917

$130,224

680-699

3.848%

$937

$137,460

660-679

4.062%

$962

$146,318

640-659

4.492%

$1,012

$164,471

620-639

5.038%

$1,078

$188,185

Source: MyFICO.com, as of September 14, 2017.

Being a savvy credit card user involves more than just paying bills on time and staying withing your credit limit. You'll also want to keep your total debt in check, and stay far below your credit limits when possible.

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