Credit

Crossed credit limit? Pay $25 as a punishment

Shopped without any inhibition and crossed your credit limit? Thinking what will happen next? Well, first of all, you should feel lucky since the credit card company allowed you to go over your credit limit. After the Credit Card Accountability, Responsibility and Disclosure Act came into effect, some credit card companies don’t allow consumers to cross their credit limits.

Anyway, let’s get straight to the point. Now that you have crossed your credit limit, the credit card company can charge you an additional fee between $25-$35. Plus, it would also hit your credit score badly.

What can happen when you cross your credit limit?

Credit utilization ratio is a major constituent of a credit score. It basically signifies the ratio of how much credit you have and how much debt you’ve on your shoulder. To have a great credit score, you need to maintain a credit utilization ratio between 30 percent and 10 percent.

Your credit score will drop when you max out credit cards. It is tough to predict how much your credit score will drop. But it will largely depend upon the condition of your credit score at the time you max out your cards. Your score will drop between 25 and 45 points when you have a 780 credit score.

The credit scoring model differentiates between a person who is at the threshold of crossing the credit limit and who has already crossed it. Those who have already crossed the credit limit are at a higher risk of default than those who have not maxed out their cards.

Do you know why credit scoring models penalize consumers? This is due to the fact that consumers can’t manage their credit cards properly. They spend beyond their financial means, make impulsive purchases, and as a result cross credit limits. This is a bad financial behavior and credit scoring models are not ready to tolerate it.

Conclusion

Remember, your credit score will drop when your creditor report the issue to credit bureaus. You can try to avoid the penalty by paying the balance before the statement’s billing date. Try to get information on how and when your creditor can report an over-the-limit balance to credit bureaus.