What Are Over-Limit Fees?
An over-limit fee is a penalty imposed by credit card companies when cardholders exceed their designated credit limit. In the past, credit card companies would decline transactions exceeding the limit or would allow them while charging an over-limit fee. However, with the implementation of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, these practices have largely been curtailed.
Key Takeaways
- Avoiding Unexpected Penalties: Over-limit fees are charged to customers who surpass their credit limits.
- Regulation in Place: The CARD Act of 2009 significantly altered how over-limit fees are managed, including putting caps on such fees.
- Opt-In Requirement: Customers must now opt-in to exceed their credit limits, accepting any potential over-limit fees consciously.
- Limitations on Fees: Credit card companies are restricted from charging over-limit fees exceeding the amount by which the credit limit was overrun.
- Minimal Occurrence: Since the CARD Act came into effect, over-limit fees have become virtually non-existent.
The Mechanics of Over-Limit Fees
Over-limit fees are tools used by credit card issuers to manage risk. Given that credit cards are a form of unsecured debt lacking collateral, mitigating the risk posed by high-spending customers has always been crucial. Over-limit fees discourage excessive spending while generating revenue.
Before the CARD Act, many issuers auto-enrolled customers into programs that allowed exceeding the credit limit, thus triggering these fees. Post-CARD Act, this opt-in option became mandatory, offering protection against unwanted charges. Paying off the entire balance monthly is a key strategy to avoid not just over-limit fees, but also high-interest rates.
Managing Over-Limit Fees
When a credit card is issued, it comes with a set credit limit dependent on a customer’s credit history. For example, someone with a stellar credit history might have a $10,000 limit, while another with a poor history might be capped at $2,000.
To manage your credit effectively, consider these tips:
- Regular Checks: Regularly monitor your credit card balance to remain below your credit limit.
- Avoid Opt-In: Forgo the option to exceed your limit. Your transactions will be declined at the threshold, preventing unwanted fees.
- Dispute Unapproved Fees: If you’ve not opted-in but were still charged, dispute the charge with your issuer.
Common Over-Limit Fee Amounts
Per the CARD Act, the over-limit fee should not exceed the amount by which the limit was surpassed. For example, if you go over by $50, the fee cannot exceed $50. These fees are limited to once per billing cycle, or twice if the balance stays above the limit.
As of 2021, the first over-limit fee generally stands no higher than $27, with a second occurring within six months potentially reaching $38. Notwithstanding, over-limit fees have largely been phased out by major issuers like American Express since 2009.
Consequences Beyond Fees
Chronic limit breaches can result in added finance charges, reduced spending limits, accelerated payment schedules, higher minimum payments, and possibly the cancellation of the card.
Related Terms: credit card, credit limit, CARD Act, interest rates, minimum payments.
References
- Government Publishing Office. “Credit Card Accountability Responsibility and Disclosure Act, 2009”, Page 123 Stat. 1739.
- Consumer Financial Protection Bureau. “Section 1026.52, Limitations on Fees”.
