What happens if my credit card is overdrawn?

Most credit cards come with a credit limit, which is the maximum amount of money that can be owed in a billing cycle. Typically, your credit limit is determined by your issuer when you apply for the card, based on factors like your income, current debts and credit history. 

You can use your card to make purchases up to your credit limit. For example, if you have a limit of $1000, you can’t spend more than that on the card until your billing period resets. 

What happens if my credit card is overdrawn?

If your credit card is overdrawn or you have hit your limit, new transactions will often be declined. Most card issuers will send you a text or email when you are about to hit your credit limit. It’s up to you to keep an eye on how you’re tracking against your limit though.

Some lenders still process transactions over the credit limit, so it’s worth checking your card issuer's policies. For credit card accounts opened after 1 July 2012, you cannot be charged a fee for exceeding your card limit unless you have agreed to such an arrangement expressly. You are also free to withdraw your consent at any time. 

Often, once you hit your monthly limit, automatic payments and subscriptions linked to your card will also be automatically declined. Again, you may get a warning message about this if you have regular direct debits coming out of your account.  

Your credit score may also drop if your credit account is frequently overdrawn. A lower credit score can affect your ability to get loans and credit in future. Card issuers can also increase the interest rate on your credit accounts. 

How can I avoid going beyond my credit limit?

Spending beyond your credit limit has several negatives that quickly overweigh any benefits. Here are some tips to avoid going over the limit on your credit cards:

• Monitor your credit card balances regularly

With plastic money, it is easy to lose track of your spending. To avoid this, review your credit card balances regularly to know how much credit is remaining and try keeping your spending below this amount.

• Make frequent credit card payments

You can try paying your credit card balances more frequently to increase the available credit for new transactions.

• Set-up a hard limit on your credit card 

Some credit card issuers allow you to impose a hard limit on your credit card account. Once you enable this, any transactions made by you over your credit limit will be automatically declined by your card issuer. You can also set a limit on the amount you spend each month to keep your debt under control.

What do I do if I am unable to pay off my existing credit card balance?

If you cannot pay the outstanding amount on your credit cards, one option is a balance transfer credit card. Some balance transfer cards offer a low or zero per cent interest rate on the transferred amount for a limited time.

After that time, the interest rate goes up, and it might be higher than what you were paying on your original credit card. Therefore, you need to be realistic about the amount you are transferring; whether you’d be able to repay it in the limited time or not, as the unpaid balance will attract a higher rate of interest. 

If you’re frequently finding your credit card is getting overdrawn, it could also be worth speaking to an expert or trusted friend about setting up a spending plan to avoid spiralling debt.  

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