Credit Card Overdraft – What You Need to Know

Can you overdraft a credit card?

“Overdrafting” is the term you’d use if you spend more money than what you have available in your checking account. You can’t “overdraft” a credit card because credit card issuers shouldn’t approve a transaction that puts you over your credit limit (unless you’ve consented to over-the-limit charges).

For example, if your credit card limit is $5,000 and you have used $4,900, any transaction over $100 would be declined.

You won’t be charged additional fees if you try to make a purchase and are declined, but you also won’t be able to complete that purchase using that card.

However, if you have opted in to over-the-limit charges, you can spend more on your card than your credit limit. So in the example above, if you’ve used $4,900 and had a $200 transaction, you’d be $100 above your credit limit. In this case, you may have to pay over-the-limit fees and your credit score may decrease.

What happens if you try to overdraft your credit card?

If you try to spend more than your credit limit on your credit card, a few things can happen:

1. Declined transactions

If a purchase is going to push you over your credit limit, the transaction will likely be declined. If this happens, you won’t be able to complete your purchase, but you also won’t be charged any fees or balance overages.

2. Over-limit fees

If you’ve opted into a program such as over-the-limit coverage or protection plans offered by your card issuer, the company can authorize transactions that exceed your credit limit. This will keep your card from getting declined, but these programs also typically come with extra fees.

Since the CARD Act of 2009, you can’t be charged over-the-limit fees unless you opt into them. They usually aren’t more than $35, and they are limited to the amount you exceed your limit.

For example, the first time you go over your limit you may be charged a $25 fee. The second time, it may be $35 (if within a certain period of time). However, if you only go over your limit by $15, the fee cannot be more than $15.

Also, note that the fee may be charged more than once if your balance remains above the limit in the next billing cycle.

3. Impact on your credit score

Spending more than your credit limit can increase your credit utilization ratio, which can decrease your credit score. Your credit utilization is how much of your available credit that you’re using, and experts suggest keeping it below 30%. The higher it is, the more damage it can do to your credit score.

For example, if your credit limit is $15,000 but you have a balance of $16,000, your credit risk is much higher because of your high utilization ratio. This can do greater damage to your score because your credit utilization is above 100%.

Keep in mind your utilization ratio is calculated using all of your outstanding credit, not just the balance on one credit card. For example, if you have three credit cards, all will be considered. If you have more than one card and the other(s) have low or $0 balances, exceeding your limit on one card won’t necessarily hurt your score, but you should still avoid this situation.

What if you go over your credit limit?

1. Turn off the over-the-limit coverage

If you opt into the over-the-limit coverage, the first thing you should do is request to opt-out. In some cases, you may have to send a written request, but immediately let your card company know that you don’t authorize any more transactions that will put you over your available credit limit.

2. Make additional payments

Next, pay down your card balance until it’s at least below your credit limit. This can help you avoid additional fees and more damage to your credit.

3. Avoid using your card

If you’ve gone over your credit limit, avoid using your card (at least until you’ve paid down the debt below the limit). You can also stop using the card for a longer period of time while you focus on paying down the debt more, creating a budget you can stick to, and getting control of your finances and handling your debt.

4. Ask for a credit limit increase

If you think going over your credit limit may be more than a one-time thing, you can request a credit limit increase. Sometimes this may happen automatically if you’ve demonstrated a longer period of time as a responsible cardholder. Other times, you can request it by contacting your credit card company and simply asking for one.

Just because you ask for a limit increase, though, doesn’t mean you’ll get one. And if you are approved, it’s important to stick to your budget and avoid spending more just because you can.

5. Consider closing the account

Closing a credit card could increase your credit utilization ratio and decrease your age of credit history, which can negatively impact your credit. However, if keeping it open and not using it isn’t working, the hit may be worth it and you may want to consider closing it.

Note that even if you close the account, you still are responsible for paying at least the minimum monthly payments (on time and in full) and you can still be charged interest on the balance you owe. However, you won’t be able to put new charges on the card, so your balance won’t continue to grow from additional purchases.

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