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Canadian Credit Cards > Credit Card News > Going over your credit limit is possible -- at a cost

 
 

Going over your credit limit is possible -- at a cost

By Kristen Frisa and Kira Vermond

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A decade ago, if shoppers tried to use a maxed-out credit card, they likely heard the dreaded words, "I'm sorry, but your card has been declined." Red-faced, they headed for the door without the purchase. Now, in some instances, customers can go over their limit -- at a cost.

All credit cards come with a limit, and if you spend more than the amount available, there are all sorts of repercussions, even for small slip-ups.

overlimit-fees

"Whether you go over by $1.17 or $55, if the credit granter accepts the charge, you've gone over your limit and you're responsible for it," says Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada Inc., in Toronto.

And that's if the charge is accepted. Credit card companies do not guarantee that they'll approve a charge that pushes you over your available credit limit.

CIBC's cardholder agreement says specifically that, "We may in our discretion permit you to exceed your Credit Limit by authorizing Transactions, but we are not required to do so even if we have done so in the past."

Even if your charge is approved, don't expect to keep using the card indefinitely.

"If you have exceeded your Credit Limit, you may wish to make a payment before your payment due date because we may decide not to authorize any further Transactions after your Credit Limit is exceeded," the CIBC agreement states.

Going over your credit limit is a gamble. Here's what else should you know about taking a credit card to the max.

1. You'll (likely) be charged penalty fees.
If you exceed your credit card limit, you can expect to see a special "over-limit" fee tacked on to your next monthly statement. TD Canada Trust, RBC Royal Bank, Scotiabank and CIBC's over-limit fee is $29. The over-limit fee will be charged when you go over the limit, and at the beginning of each billing cycle that your account remains over the limit.

While some banks assure cardholders the fee will only be charged once per statement, your costs for your over-limit purchase could add up fast. Theoretically, if you overcharge your account on the final day of the billing cycle and don't catch your error until after the billing cycle rolls over, your purchase could cost you the over-limit fee twice in as many days.

Not all cards charge over-limit fees, though. CIBC's Visa Infinite Privilege and TD Visa Infinite and Visa Infinite Privilege Accounts don't have over-limit fees. It's always a good idea to check your agreement to see if your card issuer waives the penalty.

2. Your credit score will sink.
Maxing out cards or spending more than your limit are surefire ways to send a signal to companies such as Equifax or TransUnion that you're having a hard time managing your debt, says Elena Jara, director of education for Credit Canada Debt Solutions Inc., in Toronto.

"If a consumer is relying on credit and often going over the limit, this is a warning sign that there may be some personal financial mismanagement," she says. Because credit utilization - how much you owe compared to how much credit is available to you - accounts for approximately 30 per cent of your credit score, it's easy to see why using all of your available credit looks bad.

It's important to appear responsible and in-control of your spending to keep your score in good standing.

You could also see your credit limit lowered or your account closed if you can't keep up with payments.

3. You could get caught in a debt cycle
The problem with over-limit fees is that if you don't take action to pay off your debt quickly, it's easy to get trapped in a cycle in which you're paying the penalties for months.

For example, let's say you go over your limit by $20 and get a $29 fee. That's $49 you automatically have to pay off even before tackling any other debt. Making the minimum payment could put you back under your limit, but then tack on a month of new interest charges, and next month there's a good chance you'll be over the limit again.

Get off the treadmill
There's a simple way to stop paying over-limit penalties, of course: Pay more than the minimum balance on your credit card each month and stay well away from the limit. Check your account balance regularly, either online or by calling the card company.

If you find you're going over your limit accidentally, some credit card companies offer features that will send you a message when you're near your limit, such as CIBC's Spend Alerts.

The Financial Consumer Agency of Canada's (FCAC) website suggests that "if you're often close to your credit card limit, you can ask your financial institution to stop any transactions that will go over the limit." The website warns that there are not guarantees on this service, and not all financial institutions will offer it.    

There's also one more option, although it should be used in very special circumstances. If you find that you sometimes go over your limit, but you are typically able to pay your bill in full each month, maybe your card's limit is actually too low.

Schwartz says he sometimes sees this in cases in which a person pays all of his or her bills with the card to generate reward points. Sometimes students will find themselves over the limit, too, if, for example, their card's limit is $1,000, but their plane ticket home runs closer to $1,300.

For most people though, it's a better idea to rein in spending rather than to ask for a higher limit. Most people max out cards not because they're using credit wisely, but because they're living beyond their means.

"You need to look at your spending behaviour and ask if you really need that increase in your limit," Schwartz says. "Will it get you in more trouble if you take it?"

See related: Editor's Choice: 7 free online budgeting tools, How to get a raise (on your credit limit)

Updated: May 15, 2017