Over-the-limit fees are a painful, but preventable punishment
By Lucy Lazarony • Bankrate.com

Editor's note: In February 2002, NextCard's parent company, NextBank, was closed by Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) was named receiver. The company no longer issues credit cards.

Memo to credit card users: saving face is going to cost you cash.

Not that long ago, if a meal in a fancy restaurant pushed you over your credit card limit, your card would be declined. And before the waiter finished saying, "I'm sorry," you'd be digging in your pocket for another card.

"That was an experience probably everybody over the age of 30 has had once in their lives. That's why you carry more than one credit card," says Lewis Mandell, author of The Credit Card Industry, A History, and dean of the School of Management at the State University of New York at Buffalo.

"It causes a little bit of embarrassment to the person, but if you live long enough, it happens to everybody."

Today, that limit-busting charge would go through and your dinner date would have no idea that your Visa is charged to the hilt. But you would also be socked with a hefty penalty fee. Over-the-limit fees of $25 and $29 are common.

Norm Tapper, a Bankrate.com reader in Indiana, was charged a $25 late fee and $25 over-the-limit fee on a Capital One card with a $300 limit.

"The fees are not reasonable. They're not even close to reasonable," Tapper says. "I think they're gouging people. I don't see much difference between what they're doing and a loan shark."

A preventable pain?
Issuers point out that fees are spelled out in a credit card agreement and monthly statements list credit limit and balance information and due dates.

"The fees are completely preventable," says Diana Don, a spokeswoman for Capital One. "You have the information. It's really a cardholder's choice."

Fleet Credit Card Services is one of several issuers that charge $29 over-the-limit fees. Doesn't charging $29 for going a few bucks over a limit seem kind of harsh?

"That's pretty standard out there," says Deborah Pulver, manager of planning and communications for Fleet Credit Card Services. "It's not something that should come as a shock to people. It's something they agree to when they sign up for a card."

But a lot of people are shocked by over-the-limit fees. In fact, most people learn about a card's over-the-limit penalty after they get charged one.

"Consumers don't usually go into a card agreement expecting to be delinquent or over-the-limit, so they don't look at those fees too carefully," says Peter Davidson, executive vice president at Speer & Associates in Atlanta.

Let them spend
Why don't issuers just decline charges that push people over-the-limit?

"The main reason is convenience. The second reason is we don't want to embarrass someone at the point of sale. The third reason is we don't want to strand anyone," says Fleet's Pulver.

"If you have a broken down car in the middle of Iowa, do you want to be declined because you're at your limit?"

Let's not forget about the money that issuers make off these fees. Bank card issuers received $5.5 billion in penalty fees in 1999, according to Credit Card Management Magazine. Ninety percent of the penalty fees, or $4.95 billion, were from late payments. Most of the remaining $550 million is from over-the-limit fees.

"I think they're just looking to make quarterly profits look a little better," says Mandell of the penalty fees.

"The issuers are maybe getting a little bit greedy. You always have to look at the long-term effects of what you're doing ... . There are ways of nickel-and-diming customers that will come back and bite them in the butt."

Not every issuer is so quick to charge an over-the-limit penalty. Citibank gives customers a chance to pay down an over-limit balance before charging a fee. Say a customer has a $1,000 credit limit and makes a purchase that pushes their balance to $1,040. If the customer pays down to within their $1,000 credit limit with their next payment, no over-the-limit fee will be assessed. But if they don't, a $29 over-limit charge will show up on their next billing statement.

Credit card issuers have two basic choices when a customer makes a purchase that exceeds a credit limit. They can decline the transaction or approve the transaction and charge a fee.

Gold-carpet treatment
A third option, approve the transaction and automatically lift the credit line, is reserved for the very best credit card customers.

"All three happened 10 years ago and all three are happening today," says Marc Sacher, managing associate at Auriemma Consulting Group, Westbury, N.Y. "The difference is there's more information for banks to look at so they can decide which way to respond."

Today's issuers are adept at targeting card offers to a customer's specific credit profile and that includes the handling of over-the-limit charges. Issuers decide what customers can go over credit limits and by how much. The last thing an issuer wants to do is decline a card purchase.

"From a philosophical point of view banks are always trying to reduce the number of declined transactions," Sacher says. "They're trying to avoid having to say no.''

What a difference 20 years makes. In the late '70s and early '80s most credit card issuers just said no to over-the-limit charges.

"Back in those days people actually used the limit as the limit," Davidson says.

Then banks decided to let customers with good credit charge over their limits for small fees of $2 or $3.

Fees go up, rarely down
To offset losses, issuers jacked up over-the-limit fees and late fees in the mid-80s and again in the mid-90s. There's little chance of penalty fees coming down anytime soon.

"I don't think anyone ever found a competitive advantage in lowering them," Davidson says.

So it looks like issuers will continue to charge bigger and bigger fees to customers that outgrow their credit limits. Don't let it happen to you. Here's how:

• Monitor spending closely. Keep track of credit card purchases and stay well within your limit. Leave a big enough cushion on your card for large, unexpected expenses. Some consumer experts recommend keeping one credit card cleared for emergencies.
• Sign up for free e-mail alerts. Issuers such as Discover, The NextCard and Fleet Credit Card Services, will send e-mail reminders to customers that are nearing credit limits.
• Make the limit your limit. Cardholders at Capital One can request that any limit-busting purchase be declined at the point-of-sale. However, most credit card companies refuse to provide this service.
• Call ahead and get that limit raised. If you know you're going to go over a credit limit with a purchase, call ahead and request a line increase. Issuers grant credit line increases on a case-by-case basis. It's a worth a shot and it could save you $30.
• Check out cards from local banks and credit unions. Penalty fees are much lower, typically $5 to $15, and smaller institutions are much more lenient when it comes to charging them. For example, at Suncoast Schools Federal Credit Union in Tampa, the $15 over-the-limit fee is not imposed until you exceed the credit line by 8 percent.

--Posted: Oct. 16, 2000