Can you spend beyond the sanctioned limit on your credit card?
Let us say the sanctioned credit limit is Rs 1 lac. Can you do a purchase transaction of Rs 1.25 lacs? Or can the total unbilled transaction add up to more than Rs 1 lac?
Apparently, you can. You can spend beyond the sanctioned credit limit. Such transactions are called overlimit transactions. I did not know this and found out only recently.
I am not speaking about a scenario where you have credit balance (due to extra payment) and then you manage to make a payment higher than your credit limit. Or when your outstanding balance exceeds the credit limit because of interest cost and penalties due to non-payment of dues.
Now, you might think, what’s the harm if the bank is OK with lending you more than the credit limit? For you, this means higher flexibility. That’s right but there are issues.
Overlimit Usage Has a Security Angle Too
Credit limit is an inbuilt security feature in credit cards. After all, nobody can defraud you for more than the credit limit. If your bank can accept overlimit transactions, we have a problem.
Fortunately, usage beyond the sanctioned credit limit requires an explicit consent from the card holder. As per RBI regulations, this is not enabled by default. How would you give such a consent?
I reproduce an excerpt from RBI FAQs on credit card and debit card-Issuance and Conduct transactions dated March 7, 2024.
Query 10. Can a card-issuer allow a credit card to be used beyond the sanctioned credit limit and charge overlimit fees?
Response: Usage of a credit card beyond the sanctioned credit limit (i.e., overlimit) requires prior explicit consent of the cardholder, as a fraud minimisation mechanism. Further, a cardholder shall be given an option to enable or disable the option of overlimit through transaction control mechanism available on card-issuer’s platforms such as internet, mobile banking, or any other suitable medium. Unless explicit consent has been obtained from the cardholder for the overlimit facility, no overlimit can either be provided or overlimit charges be levied.
Query 11. Whether interest, taxes or any other charges can be considered for computing a cardholder’s credit limit usage for the purpose of levying overlimit charges?
Response: Interest or any charges/fees on the credit card shall not be factored in for the purpose of computing a cardholder’s credit limit usage and levying overlimit charges.
Hence, your bank may give an option to enable or disable this option from net banking platform, mobile bank app, or any other medium.
I happened to check my credit card statement where the bank shows an illustration of calculation for Minimum Amount Due (MAD). In the illustration, it showed how Overlimit fee will be applied if your outstanding balance exceeded the sanctioned limit. As per the illustration, the bank charges 2.5% of the overlimit amount subject to a minimum of Rs 550 +GST as overlimit fee. Your bank could use a different formula.
However, I could not find a way to enable “overlimit” on the mobile app or the net banking website. In a way, it is a good thing. Given a choice, our minds can do crazy things. When there is no option to enable “Overlimit” transactions, there won’t be any overlimit transactions.
When high utilization of the credit limit is concerning, the overutilization (more than the sanctioned credit limit) is clearly a big problem.
Is There Any Limit for “Overlimit”?
It is NOT clear how far beyond you can go beyond the sanctioned limit. For instance, if your credit limit is Rs 1 lacs, when would the bank say “Enough”? At 1.1 lac or Rs 1.25 lacs or 2 lacs or 5 lacs? I could not find anything pertaining to the limit of “Overlimit”. RBI Master Directions are silent on the quantum.
The banks would have internal guidelines. They can’t let you borrow infinite amounts. The quantum can be absolute (nominal), or percentage based (% of sanctioned limit).
Overlimit Transaction Affects Minimum Amount Due (MAD) Calculation
Any utilization beyond the sanctioned limit becomes part of the Minimum Amount Due.
For instance, if the sanctioned limit is Rs 1 lac and you have spent Rs 1.2 lacs on your credit card. MAD is, say, 5% of the outstanding amount.
In this case, the MAD will be 5% of Rs 1 lac + (1.2 lacs – Rs 1 lac) = Rs 25,000
This is before the overlimit fee and other charges that the bank may levy. Does not include any EMI payments either.
Over utilization will also impact your credit score adversely. Hence, while you do have an option, it is best left un-exercised.
Additional Reading
- Why paying Minimum Amount Due (MAD) is a bad idea?
- RBI asks banks to revise formula for Minimum Amount Due (MAD)
- ICICI Bank Credit Card: Description of Over-limit fee (Search for Overlimit or Over-limit)