Over the past few days, I’ve written a few posts about how credit cards have instituted new penalties in the past few years. They’re deceptive because you often don’t find out these terms until your application for credit has been accepted. Many long-time credit holders don’t even realize these newer practices exist!
So far, we’ve seen two-cycle billing, in which your interest is calculated based on the average daily balance of your last two billing periods, and universal default, where all credit cards may raise your interest rate if you default on any one other credit card or loan. An additional practice that deserve some explanation is the over-limit fee.
What are over-limit fees?
Once upon a time, if you tried to make a purchase beyond your “credit limit,” your card would be declined. We’ve all seen this on television and in the movies. The fallen millionaire or the high-powered executive is at dinner in an upscale restaurant, proving to his crowd that he is still king. The waiter comes back with the bad news: “I’m sorry, sir, it seems your credit card was declined.” The guests glance away to spare him the embarassment.
The response in hushed tones: “I’m sure if you run it through again, it won’t be a problem.”
And the waiter: “Do you have another card?” The scene goes on and ends with a good friend helping out the fallen hero.
This scenario is becoming less common. For most credit issuing companies, your “credit limit” is more like a “speed limit.” It is physically possible to go above and beyond the legal speed limit, but you may be stopped and given a ticket. The difference is this: when you go over your credit limit, you won’t be stopped, you’ll be fined. Here’s what MSN has to say:
If you have a $5,000 credit limit and you use your card to buy something that costs $5,010, don’t expect the charge to be denied. Instead, expect your issuer to charge you a fee of $30 or more. Maybe you think that’s worth it for the convenience.
These over-limit fees can accumulate quickly. Since there is no warning, if you are at your limit and continue to make purchases, you can get slapped with a fee each time the card is used. At $30 a pop, pretty soon we’re talking about real money. The credit company may also charge an additional fee at the end of your billing cycle, just because your ending balance was above your assigned, preset spending limit.
If you track your expenses and you know your credit card’s limit, you shouldn’t run into any of these problems. However, you can be penalized even if you pay your entire balance off each period, if you don’t know your limit. If you plan on making a large purchase that might bring you close, call your credit card company to ask for a higher credit limit. If they won’t grant it to you, ask for a “temporary” limit increase for a specific purchase.
Bankrate has five tips for managing your credit card spending limit:
- Monitor spending closely.
- Sign up for free e-mail alerts.
- Make the limit your limit.
- Call ahead and get that limit raise.
- Check out cards from local banks and credit unions.
There is something else to watch out for. Some credit cards will lower your credit limit to match your spending patterns (to increase the chance of you going over your limit). The companies are required to send a notice to you, but often the notice will look like typical junk mail. Many people, including myself, have tossed “change in terms” notices in the trash without thoroughly reading the information. These notifications are almost never sent through e-mail, even if you activate alerts as Bankrate suggests.
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You should actually always try not to use your credit cards beyond 50% of the limit as it really hurts your credit score. Even if you pay off the balance every month (this is because you don’t know when the credit bureau will take a snap shot of your account). ALWAYS keep your balance under 50% of the credit limit and watch your credit score climb. If you really have an emergency, fine, that is one of the benefits of credit cards; just know that it will probably hurt your score.
Another thing to watch out for is not to be too close to your limit at the end of the month because when the creditor charges you the monthly interest it can put you over your limit and you will get hit with an ‘over limit fee.’ If that happens you can call your credit card company and ask them to waive it but there is no guarantee they will.