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I may be a personal finance blogger, but rules change so quickly — especially when it comes to FICO credit scores — that I admit I don’t know it all, So, when I made a few big purchases and maxed out my Chase Freedom credit card — and then some — I wondered what this would do to my FICO score.
How does surpassing your credit limit affect your credit score? Keep reading to find out.
The scenario: You have an American Express charge card with no pre-set spending limit, or a World MasterCard or Visa Signature high-end credit card that permits you to exceed your credit limit as long as you pay off the amount over your limit in full when the bill comes due.
If you have one of these cards, it may be advertised as having “no preset spending limit,” but you may see a credit limit amount on your statement each month. Anything you charge over that amount must be paid by the time your bill is due.
How Going Over Your Credit Limit Affects Your Credit Score
With normal credit card accounts, you want to keep your credit utilization ratio below about 30 % for a high credit score, and definitely below 50%. Since your balance won’t be reported until the end of the billing cycle, it’s okay to charge more than 30% and pay it off before you receive your statement. But you want your statement to show a balance no greater than 30%.
However, the three major credit bureaus that calculate FICO scores look at charge cards and credit cards with no pre-set spending limit a little differently. They will do one of two things:
- Ignore charge cards completely when it comes to credit utilization ratio
- Calculate credit utilization based on your highest balance in the past few years on that card
If the credit bureau does the latter, keeping a similar balance each month (which you may do if you use your charge card to pay the same expenses monthly) can hurt your credit score. If you regularly charge $2,000 per month on one card, that’s considered your “credit limit” and your credit utilization would be 100% (or close to it) each month, even if you pay the bill in full when it’s due.
On the other hand, use that same card one month and charge $4,000, and that becomes your high balance/credit limit. Now your credit utilization the next month will be calculated as a percentage of $4,000. So if you go back to charging only $2,000 the next month, your credit utilization is 50% for that card. Ideally, try to charge four times more than usual on that card for one month, and your credit utilization will be down to an excellent 25%. (Of course, if you have other credit cards with a low credit utilization, you can aim for a slightly higher percentage.)
Whatever you do, make sure you pay the card in full when you receive the bill to avoid interest charges and to keep your credit utilization ratio down.
In the case of cards that list a credit limit but don’t force you to stick to it, you can drive up that “available credit” number by exceeding your limit one month and paying it off when it’s due.
How Do Credit Bureaus Treat Your Credit Cards?
You’re probably wondering how the credit bureaus treat the specific cards you have. (I know I am!) It’s time to get your free annual credit report from the three agencies to find out, and then you can take the appropriate action.
Remember that your credit score may drop slightly the month that you max out credit cards, so don’t max out your cards if you’re getting a car loan, applying for a mortgage, or planning to open new credit accounts in the next month or two. However, it is a great move six months prior to a major credit application to improve your credit score and get a better interest rate.
How Do I Learn More About Improving My Credit?
If you want to learn more about improving your credit, check out these articles:
- Factors Affecting Your Credit Score — This article includes some helpful tips on getting the different aspects of your credit score under control.
- How to Understand Your Credit Report — This article goes through everything you need to know on how to read and understand your credit report. After all, the first few times you look at one, they can seem awfully confusing.
- 22 Common Credit Score Myths Debunked — there is a lot of bad credit advice out there. This article shoots them down, and will prevent you from wasting your time.