Overlimit Fees: Don’t Opt In!

Sep 24, 2012 by

CARD Act signing

The CARD Act of 2009 signed into law.

Remember the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009? The reform legislation’s aim was to “…to establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan, and for other purposes.” Among the CARD Act’s major provisions is one affecting credit limit administration.

What’s a Credit Limit?

When you opened your credit card account, the card issuer established a credit limit, based loosely on your credit score and your card issuer’s educated guess of how to make the most money from you. (The card issuer doesn’t want to lend you so much that you give up, stop paying, and default, but rather just enough to make it easy for you to overspend, max out your limit, and pay lots of juicy interest and perhaps a late payment fee here and there!) Your credit limit is—in theory—the most you can borrow using the credit card.

Before CARD

Prior to the CARD Act going into effect, credit limits were a prime tool card issuers used to extract cash—in the form of “overlimit fees”—from consumers. Cardholders naturally thought that a purchase that would push them over their account limit would be declined at the cash register. Wrong! In most cases, the transaction would go through, and the card issuer would immediately ring up a $39 (typically) overlimit fee. Ka-ching!

Now’s when the fee fun really began. Cardholders would be hit with an overlimit fee if at any moment during the billing cycle they borrowed more than their card’s limit. If they didn’t pay enough on the credit card by the due date to bring the balance below the account’s credit limit, they’d get hit with the same fee the next cycle. In fact, if they paid just enough to get the balance below the credit limit, but the next cycle’s interest charges raised the balance back above the limit, they’d get hit with an overlimit fee. Since overlimit fees become part of your account balance, cardholders were also paying interest on them in later months at their regular APR. Ugly? Very.

After CARD

According to a study by the Office of the Comptroller of the Currency (I always wanted to be a “comptroller”), the CARD Act has virtually eliminated overlimit fees. The OCC concluded that the number of accounts hit with an overlimit fee at least once per year dropped from 12% pre-CARD to 1% post-CARD.

Careful Not to Opt-In to Overlimit Fees!

But does the CARD Act and consequent forced change in card issuer behavior mean that your overlimit purchase will now be turned down at the cash register? Not necessarily! The OCC says all of the nine largest credit card issuers continue to process some overlimit transactions. And a Consumer Finance Protection Bureau industry survey found that three of the top nine issuers still charge overlimit fees, if the cardholder opts in to allowing overlimit transactions to be processed.

The CARD Act requires card issuers to offer consumers the option of having a fixed credit limit that cannot be exceeded.  Unless you opt in to allowing processing of overlimit transactions, you cannot be charged an overlimit fee. But you may have been seduced by your issuer into opting in to overlimit transaction process, and thus overlimit fees. Envisioning the embarrassment and inconvenience of your credit card being turned down at the cash register, you may have opted in to overlimit transaction processing without understanding you were also at the same time giving your card issuer permission to charge you an overlimit fee!

Check With Your Issuer

If you’re like me, you have little idea whether you’ve opted in to overlimit transaction processing. Just phone your card issuer and ask. If you did opt in, tell them you want to opt out—you want overlimit transactions to be turned down at the cash register. You’ll get two benefits: 1) You’ll never be hit with an overlimit fee, and 2) your credit card debt is automatically braked at your credit limit.

Don’t Passively Accept Credit Limit Increases!

And on the topic of credit limits, if you get one of those ego-stroking letters from your credit card issuer warmly acknowledging your good citizenship and announcing your reward—a new, higher credit limit—take a moment to reflect:

  • Do you need more credit?
  • Between you and the credit card issuer, who’s the credit limit boost most likely to help or hurt?
  • Isn’t the letter intentionally designed to present the new, higher limit as a status symbol, to undermine your good common sense about credit?

Just because you’re offered more credit doesn’t mean you must accept! If you don’t need it, call your issuer and decline the increase. (And by “need” I don’t mean you want to allow yourself to spend beyond your means!) If the issuer refuses, tell them—and mean it—that you’ll close the account if your limit is raised against your wishes. You’re the customer, which means you’re always right—right?

How About You?

Since the CARD Act became law in 2009, have you gone over your card’s limit and been charged a fee? Has your credit limit been raised without you asking for more credit?

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