Here’s why you shouldn’t purchase beyond your credit card limit

Did you know you can use your credit card beyond the assigned limit? Generally, credit card issuers set limits as a risk management measure to control the amount of credit extended to an individual. By assigning a credit limit, issuers can mitigate potential losses in case of defaults or inability to repay the borrowed amount. Credit card limits are also indicators that help lenders know your creditworthiness, income, and repayment capacity. A higher credit score and positive credit history generally indicate lower credit risk and might lead to a higher credit limit. 

What happens if you exceed the limit? 

In most cases, the lender will decline your transaction if you attempt to make a purchase that exceeds your credit limit. The merchant will receive a message indicating that the transaction cannot be processed due to insufficient credit. 

Adhil Shetty, CEO of BankBazaar.com, said, “In certain situations, if you have a good payment history and a strong relationship with the credit card issuer, you may be granted a temporary credit limit increase to accommodate a specific purchase. You may need to contact your credit card issuer in advance to discuss the possibility of a temporary limit increase to avail of this." 

“Some credit card issuers may allow transactions to go through even if they exceed the credit limit, but they may charge an over-limit fee. This fee is typically added to your credit card balance and must be paid along with your regular payments. Exceeding your credit limit may result in penalty interest rates being applied to your account. These rates tend to be typically higher than the standard interest rates and can lead to increased finance charges on your outstanding balance,” added Shetty. 

However, you must also know that people usually readjust their credit limit on their own. For instance, if you get a credit limit of Rs 3 lakh from the card issuer, you can readjust it to Rs 1 lakh using your bank’s app. In that case, if you exceed the transaction limit, your transaction will fail, and no penalty will be levied. In such a scenario, if your spending goes beyond the limit, you can increase your credit card limit using the app and use your card for making further transactions. 

Do issuers levy over-limit charges?  

Generally, the issuer or the bank can approve certain transactions attempted by you that can breach the credit amount or exceed the credit limit. However, in that case, the borrower must pay additional charges to clear the bill on the due date. 

This charge varies depending on the issuer, the card variant, the customer’s credit history, and the issuer’s policies. For instance, some issuers may merely decline the transaction, whereas others may temporarily allow it with or without penalty.

For instance, in the case of credit cards issued by HDFC Bank, ICICI Bank and Axis Bank, if you exceed the credit limit, an over-limit fee of 2.5 per cent will be levied, subject to a minimum of Rs 550. For some cards, Axis Bank charges a 3 per cent over-limit fee. In the case of SBI credit cards, over-limit consent will allow evaluation of over-limit transactions done by customers. Without permission, all over-limit transactions will get declined due to insufficient credit limit, according to the data sourced from the respective banks’ website. 

Things to keep in mind 

Exceeding your credit limit can have a negative impact on your credit score. It may indicate a higher credit utilisation ratio, a factor considered in credit scoring models. High credit utilisation can lower your credit score and affect your ability to access credit in the future. 

Hence, you must check your credit card terms and conditions on the issuer's or bank's app. If you find an option to turn off the over-limit facility on your credit card, you should do so because, in that case, if you spend more than the assigned limit, your transactions will be declined due to insufficient credit limit. And, hence, you will not have to pay any charges.