Editorial Policy

New Penalties for Credit Card Over-the-Limit Charges

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By Eva Norlyk Smith, Ph.D.
May 6, 2010

What the new Credit CARD Act has to say on penalty fees for over-the-limit charges on credit cards is simple: no issuer can charge a cardholder for exceeding the limit unless the cardholder opts in for over-limit protection. However, the variety of ways card issuers have chosen to apply this policy is considerably more complex.

For instance, while Citi cardholders who don’t opt-in for over-the-limit protection can set aside concerns about fees, they could be looking at another, even more onerous penalty: default APRs. According to Citi’s new rules, exceeding the credit line on some Citi cards can trigger penalty interest rates as high as a 29.9% variable APR.

According to Citi customer service representatives, the default penalty won’t necessarily be levied, it is an option which Citi reserves, depending on “numerous factors.” This is bank speak for saying that rate increases hang considerably on a cardholder’s past payment history on the Citi card, pattern of credit card usage, and overall credit score. In other words, those who maintain good standing with issuers are not as likely to see their rate jump as a result of a single, accidental overcharge. Nonetheless, the policy serves as a strong warning for cardholders to keep an eye on their balance.

For cardholders looking to stave off potential default rates, Citi offers over-the-limit protection for a $39 a pop. While that price may seem high, it could be worthwhile for Citi cardholders carrying considerable credit card debt.

Other card companies have taken different approaches to the new regulations around credit card over-limit fees. American Express and Discover, for example, have done away with over-limit charges entirely. Amex and Discover cardholders, who swipe for a purchase that would tip them over the limit, will simply find the transaction blocked. The two credit card companies did away with overdraft protection, because they decided that the costs and logistics involved in managing overdraft protection for select cardholders would exceed the earnings from the overdraft protection.

Bank of America has adopted a similar policy, although customer representatives indicate that one-time over-the-limit purchases may be negotiated if the cardholder calls the issuer to discuss such a transaction in advance.

Some card issuers allow over-limit transactions for a price, but will not increase APRs for consumers who don’t opt in for the service. For example, Capital One charges cardholders, who signed up for credit card overdraft protection a $29 fee. The fee is only levied for cardholders with credit lines of $500 or more, and waived for cardholders with credit lines under $500. Capital One cardholders who don’t opt in for over-limit protection will simply find their cards blocked if they try to make a purchase that would trigger an overdraft.

The bottom line: While the new CARD Act aimed to create more transparency in credit card terms and greater consumer protections, the terms and conditions of credit cards continue to be in flux, as card issuers adjust to the new rules. In short, more than ever it’s important to know your card’s policies. Read all notices of changes to terms you get in the mail, or, if you have a specific question, call your credit card company and ask them to clarity the terms for you.