Overdrafting Your Credit Card: Understanding the Risks
Overdrafting your credit card can be a costly mistake. It happens when you spend more than your available credit limit, leading to additional fees and potentially damaging your credit score.
What is Overdrafting?
When you overdraft your credit card, you are essentially borrowing money from your credit card issuer above your approved credit limit. This can happen in several ways:
- Making a purchase that exceeds your available credit: This is the most common way people overdraft their cards.
- Having a recurring payment processed that exceeds your available credit: If you have automatic payments set up for bills, you could overdraft if your available credit is low.
- Paying a bill late and incurring late fees: These fees can add up and quickly push you over your limit.
The Costs of Overdrafting
Overdrafting your credit card comes with several financial consequences:
- Overdraft Fees: Credit card issuers charge hefty fees for overdrafting. These fees can range from $25 to $35 or more, depending on your issuer.
- Increased Interest Rates: Overdrafting can also lead to higher interest rates. Some cards have a penalty APR that applies when you overdraft, leading to significant interest charges.
- Damage to Your Credit Score: Overdrafting can negatively impact your credit score. This can make it difficult to get approved for loans or credit cards in the future, and you may end up paying higher interest rates.
How to Avoid Overdrafting
- Track your spending: Use budgeting tools or apps to keep track of your expenses and ensure you are not spending more than your available credit.
- Set up spending limits: Many credit card companies allow you to set spending limits for individual categories or for your entire card.
- Use your credit card responsibly: Pay your credit card bill on time and in full each month to avoid accumulating interest and potential overdraft fees.
- Consider a credit card with a higher credit limit: If you need more credit, consider applying for a new card with a higher limit. However, make sure you can manage the increased spending power responsibly.
What to Do if You Overdraft
If you find yourself overdrafting your credit card, contact your issuer immediately to discuss possible solutions. They may be willing to waive overdraft fees or help you set up a payment plan.
Remember: Overdrafting your credit card can have serious consequences. It's best to avoid it at all costs by practicing responsible spending habits and monitoring your available credit.