Does over limit facility affect credit score?

Does Over Limit Facility Affect Credit Score?

Over limit facility refers to borrowing beyond the approved credit limit on a credit card or loan account. While it may provide temporary financial relief, over-utilizing this facility can have severe repercussions, including a negative impact on your credit score.

How Over Limit Facility Affects Credit Score

Credit scores are calculated based on various factors, including payment history, debt-to-credit ratio, and credit utilization. Over limit facility usage can negatively affect these factors in the following ways:

• Payment History: Making late payments on over limit balances can damage your credit history and lower your score.
• Debt-to-Credit Ratio: Over limit facility usage increases your outstanding debt, leading to a higher debt-to-credit ratio. A high debt-to-credit ratio indicates that you are heavily reliant on credit and may struggle to manage your debt.
• Credit Utilization: Credit utilization is the percentage of your available credit that you are using. Over limit facility usage increases your credit utilization, which can hurt your credit score. Ideally, you should aim to keep your credit utilization below 30% to maintain a good credit score.

Additional Consequences of Over Limit Facility Usage

Apart from affecting your credit score, over limit facility usage can also lead to:

• Higher Interest Charges: Exceeding your credit limit may trigger higher interest charges, further increasing your debt burden.
• Late Payment Fees: Late payments on over limit balances can result in late payment fees, adding to your financial stress.
• Account Closure: Persistent over limit usage may cause your credit card issuer or lender to close your account, further damaging your credit score and limiting your access to credit.

Conclusion

Over-utilizing over limit facility can have detrimental consequences for your credit score and overall financial health. It is crucial to avoid exceeding your credit limit and to manage your debt responsibly. Maintaining a low debt-to-credit ratio and making payments on time will help you build and maintain a strong credit score, giving you access to more favorable credit terms and lower interest rates.