Credit Card Over Limit:
Understanding Credit Card Over Limit:
A credit card over-limit facility allows cardholders to exceed their assigned credit limit, which may seem useful in emergency situations. However, using this feature comes with significant costs and risks, making it essential to understand how it works and the potential impact on your finances and credit score.
An over-limit occurs when your credit card balance exceeds the approved credit limit. For instance, if your card’s limit is ₹1 lakh and you spend ₹1.05 lakh, you have exceeded your limit by ₹5,000. This can happen due to various reasons, such as missed payments, unanticipated charges, or scheduled payments like EMIs or subscriptions.
1. Customer Convenience: Banks allow over-limit transactions to prevent declined payments, especially during urgent purchases.
2. Revenue Generation: Banks earn additional interest and fees on the excess amount spent.
3. Continuous Credit Access: Even with the extra costs, this feature ensures that you have access to credit when needed.
Fees and Charges for Over-Limit Usage
When you exceed your credit limit, you might incur:
Over-Limit Charge: Typically ₹500 to ₹750 for exceeding the limit.
Higher Interest: Interest rates may be higher on the excess amount.
GST: All fees attract an 18% GST, adding to the overall cost.
Exceeding the credit limit brings your credit utilisation ratio to 100%, signaling to lenders that you may be struggling financially. This can negatively affect your credit score, especially if it happens repeatedly.
How Does Over-Limit Affect Your Credit Score?
Temporary Impact: One incident could lower your credit score by 20-50 points.
Long-Term Impact: Consistent over-limit usage may indicate to lenders that you depend heavily on credit, making future approvals difficult.
1. Set Alerts: Opt to receive notifications when you reach 80-90% of your credit limit.
2. Review Statements: Regularly check your credit card statements to avoid surprise charges.
3. Avoid Over-Limit Facility: Turn off the over-limit feature to prevent accidental excess usage.
4. Track Subscriptions: Set reminders for recurring charges like EMIs or subscriptions.
In emergencies, such as urgent medical expenses or essential purchases, an over-limit facility might be helpful. However, it should only be used sparingly, as the long-term risks outweigh the short-term benefits.
While the credit card over-limit feature can offer immediate relief, it comes with high costs and risks. If used carefully, it can provide financial backup, but frequent usage may harm your credit score and overall financial health. Responsible management is crucial to avoid long-term consequences.
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