Summary of this article
Overlimit usage leads to fees, interest and higher repayment burden
Frequent breaches increase credit utilisation and hurt credit profile
RBI rules require consent, users can disable overlimit facility
Credit cards are widely used for daily expenses due to reasons of convenience and short-term liquidity. However, the use of the credit limit exceeding the one approved by the card issuer may lead to extra expenses and also influence the user’s credit history. Most cardholders realise this only after they see these charges in their monthly statements.
Overlimit usage occurs when the cumulative expenditure exceeds the limit assigned. For example, in the case where a credit card has a limit of Rs 1 lakh and the expenditure is of Rs 1.10 lakh, the extra amount of Rs 10,000 is considered as overlimit. Other issuers permit such transactions when the option is turned on, typically to use in an emergency but at an increased fee and interest.
When Do Overlimit Charges Take Effect?
When the user surpasses the credit limit, banks and card issuers tend to impose a fee. This charge is usually based on 2-3 per cent of the overlimit value, with a minimum fee of about Rs 500. Moreover, the card issuer also charges a goods and services tax (GST) of 18 per cent on these fees.
Interest charges continue to accrue on the total outstanding amount, including the excess portion. Average credit card interest rates charged are between 3 and 3.75 per cent per month. Unless the balance is cleared fast, the cost of borrowing might increase sharply. These fees are not standard and differ among card issuers.
What Rules Say
The Reserve Bank of India (RBI) has ensured that card issuers get express consent from the customer prior to activating overlimit facilities. The cardholders should also be allowed to turn off this feature any time.
This is to ensure that card users are informed about the dangers and cost of going beyond what they possess. When the facility becomes disabled, the transactions exceeding the limit are normally rejected, avoiding further expenses.
Implication On Credit Profile
Using more credit than what is allowed may have an impact on the credit profile of the user by raising the credit utilisation ratio (CUR). This ratio compares the amount of credit used with the total available limit and is a key factor in credit scoring models.
A CUR over 30 per cent is commonly viewed as financial strain. Regular use of over limits can thus lower creditworthiness and may influence future access to credit or loans at favourable rates.
How To Evade Overlimit Charges
By having a buffer in their credit limit, users can reduce the risk of incurring overlimit charges. Requesting a higher limit, if supported by current income and repayment history, can help lower the CUR.
Regular monitoring of spending patterns through mobile apps or account statements is another effective way to stay within limits. The overlimit facility can also be disabled to avoid unintentional overspending by declining transactions over the set limit.
Habits That Can Help
Setting alerts when spending reaches 75-90 per cent of the limit can act as an early warning. Past transactions can be reviewed to determine the trends of excessive spending. Maintaining a usage that is below 70-80 per cent of the limit is conducive to maintaining a healthy credit profile.
Auto-debits and recurring payments also need to be checked as they can push the balance beyond the limit without any notice.
