In the ever-evolving economy of India, credit cards have emerged as an essential financial tool. These cards provide rewards, convenience, flexibility etc., to the respective users.
This makes them popular among consumers. Still, while using credit cards, it is also important to be aware of the risks associated with exceeding your credit limit. Going ‘over-limit’ can result in additional charges, interest, and even damage your credit score if it is not managed efficiently.
The objective hence is always to try to stay within one’s means and not to extend the credit limit available to you. This simple exercise falls under the ambit of responsible credit behaviour.
What does credit card over-limit mean?
The over-limit facility basically allows credit card holders to spend beyond their sanctioned credit limit. This means, for example you have a credit limit of ₹1 lakh on your credit card, under this facility you are allowed to use more than the allowed limit on your credit card.
This feature comes in handy when you are faced with sudden developments, emergencies or unexpected expenses. However, using this particular facility incurs additional fees and interest charges.
Charges involved in credit card over-limit usage
Whenever you exceed your given credit limit, most banks and financial institutions levy over-limit fees. Here are a few examples:
- ICICI Bank: Charges 2.5% of the over-limit amount (subject to a minimum fee).
- Axis Bank: Charges 2–3%, with a minimum of ₹500.
These fees are further subject to 18% GST. On top of this, the standard interest rate applicable to your card, that typically ranges from 3% to 3.75% per month, is charged on the over-limit amount.
Note: These charges are not uniform across banks and may depend on internal policies or customer profiles.
RBI guidelines: How are cardholders protected?
As per the Reserve Bank of India (RBI), credit card holders must provide their explicit consent to avail of the over-limit facility. Banks and financial institutions are mandated to offer options for customers to enable or disable this feature through numerous platforms.
This hence ensures that the consumer is completely aware of potential risks, charges and related complications. This information can help credit card holders take considered and informed decisions.
How does credit card over-limit usage affect your credit score?
Do remember, frequent over-limit usage can negatively influence your credit profile and lower your credit score. This will happen as when you exceed your credit limit, then your credit utilisation ratio increases automatically.
This is an important factor in all modern credit scoring models. A high credit ratio simply signifies financial stress, heavy reliance on debt, thus reducing your creditworthiness in the eyes of the lenders.
How can you avoid credit card over-limit charges?
- Request an increase of limit: If you are someone who frequently approaches your credit limit, consider requesting a higher limit from your bank provided your financial situation allows it.
- Check and monitor spending: You should regularly check your credit card statements and set up alerts to stay within your limit.
- Opt out option: You can also opt out from this facility by reaching out to your bank to disable the over-limit facility. This is important if you are someone who is not fond of using it.
Conclusion
Therefore, understanding the implications of over-limit usage, is crucial for maintaining financial prosperity. By staying informed and practicing responsible credit management behaviour you can look to avoid unnecessary fees and safeguard your credit score and overall credit profile.
Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit scores. Mint does not promote or encourage taking credit, as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
