Credit cards are excellent tools for paying for certain purchases and collecting reward points. However, it is all too easy to get carried away and max out your card if you are not careful. Once you go over your credit limit, you will likely not be able to use your card and it can lead to significant debt if you are unable to pay it off.
What is a credit limit?
Credit limits are defined as the total amount of credit you have access to with your credit card. In other words, how much you can use your credit card each month.
When you first apply for a credit card, be it online or in-person, you will often be shown what the credit limit of your card is beforehand. When you hit the limit, then you will be unable to use the credit card until you pay what you owe.
Additionally, your credit limit can change depending on what you do. Some banks may reduce your limit if you’re always late with payments, while some might increase your limit if you’re diligent in managing your card.
What to do when you’ve hit your credit limit
Lock or freeze your card
In order to make sure that you don’t accumulate any more debt on an already maxed out card, you should consider putting a lock on your credit cards immediately. Most credit cards have this feature and can be done via the card issuer’s website or respective mobile app. Alternatively, you can also choose to freeze the card. There is no penalty or charge for freezing your account, and you can unfreeze it anytime. Remember, your priority right now is to pay back your debt, so do not indulge in too much spending and try to only pay for what you need.
Re-evaluate your budget
Review whether or not the debt you found yourself in was under your control or was due to unforeseen circumstances such as unemployment or emergency costs. This will help you get a better understanding of where your budget currently stands. Keep track of your monthly expenses and get rid of any excess spending that is unnecessary. Start with the basics such as unsubscribing from services that you rarely use, eating out, or cutting down on entertainment expenditures.
Devise a payment plan
Developing a proper repayment strategy is key. Budget for what you need and try to hold off on your “wants” until you are debt free. This new budget plan should give you an idea of your monthly payments and how to handle them. Two decent strategies to follow are the debt snowball and the debt avalanche strategy.
Debt snowballing involves making the minimum payments on all of your Credit Cards every month and adding the extra cash to the credit card with the lowest balance. This method will help to reduce the number of cards with balances faster. On the other hand, a debt avalanche requires you to pay off the credit card debt with the highest annual percentage rate (APR) first. This will help you save on interest payments over time.
Balance transfer to a lower interest card
Credit cards in general have relatively high interest charges. This is one of the reasons why credit cards are such major contributors to large monthly payments. This is where a credit card balance transfer can help. Credit cards with a balance transfer feature typically come with zero interest. This means it will lower your overall payments and allows you to pay off credit card debt without putting too much strain on your finances.
Before using a credit card balance transfer, remember that the main point of it is to use the card to pay off your existing debt. Do not use balance transfer cards to accumulate even more debt.
Seek financial assistance
If you are still having trouble organising your finances and payments, you might benefit from working with a financial advisor. Financial advisors can assist you in planning your payback and hold you accountable for following through. They might even be able to offer you advice or strategies that you never would have thought of.
For this, you could try getting in touch with Agensi Kaunseling dan Pengurusan Kredit (AKPK). AKPK is a financial advisory that assists individuals and SMEs in managing their cash flow. They offer counselling and advice on managing your finances wisely. Some of their services are also being offered for free, so there is no harm in trying it out.
Is hitting your credit limit a bad thing?
Spending close to your credit limit each month isn’t a bad thing if you can afford to pay it off. Making the most of your credit card benefits may actually require you to charge most of your purchases to it.
If you have the income and discipline, then being able to roll your credit each month is the right option. You’ll get more points and cashback from your card, and have a better credit rating in the long run.
However, you should take precautions against unforeseen expenses. Many people only have one credit card for emergencies, and are left in financial trouble if that card is maxed out with no way of covering the payments. In this situation, emergency savings will help to smooth out any bumps you might encounter in your financial journey.
