Cardholders Say “Good Riddance” to a Costly Credit Card Fee

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Beginning October of this year, Discover and American Express cardholders can breathe a sigh of relief as their credit card over-the-limit fees are laid to rest. Amex and Discover took the plunge to eliminate the fee in response to the Credit CARD Act of 2009, which mandates that card companies cannot charge over-the-limit fees unless consumers give their consent.

After doing the math, both card issuers independently arrived at the same conclusion: establishing a system through which cardholders could decide whether or not to have over-the-limit privileges (and pay the accompanying fees) would cost lenders more than they would rake in through fees.

As for the other big credit card issuers, such as Chase, Bank of America, Citi, and Capital One, it remains to be seen how they handle the new provision, which steps into effect in February of 2010. One thing is for sure though: without the income from overdraft fees, credit card companies will come up with other ways to increase their revenue.

In notifications sent out to its cardholders, American Express gave some indication of how it intends to compensate for the loss: increasing credit card interest rates and raising other fees. This is hardly welcome news for cardholders who have always stayed well within their credit limit. Nonetheless, the countless Americans charged a hefty $39 for overdrafts as low as $1.96 can breathe a collective sigh of relief.

Over the years, card companies and banks have raked in phenomenal sums through over-the-limit and overdraft fees. What began many decades ago as a not-so-friendly “reminder” to stay within one’s credit limit turned into a cash cow for card issuers. In 2008, credit card companies alone collected approximately $19 billion in penalties and fees. This year, banks are projected to make out with a whopping $38.5 billion for customer overdrafts.

Not surprisingly, those hardest hit with the fees are those most strapped for cash. Cardholders who most frequently tip over their lines are the ones who can only afford to keep a single card.