Finance charge may push you over limit

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Dear Debt Adviser,
If my credit card is under the limit, and the periodic-rate finance charges put me over my limit, can the credit card company tack on an additional over-the-limit fee? I don’t see how that is legal if it’s not an actual purchase.
— Michelle

Dear Michelle,
I, unfortunately, do not have very good news. The practice you are describing — adding an over-the-limit fee to your account when the finance charges push the balance over — is indeed legal and very common.

Although it is not a purchase, the finance charge is an addition to your outstanding balance, and that is the benchmark used. Our legislators are currently considering changes to laws and regulations to address some of these practices by the credit card lending companies. But for the time being, most companies will continue to add fees to your account whenever your outstanding balance is over your maximum limit, as defined in the cardholder agreement.

There is a class of cards out there (Visa Signature, American Express and others) that have either no set maximum or allow you to go over your maximum without an over-limit charge if you pay off the overage before the next billing cycle.

What you need to do, Michelle, is pay down your balance at once so you are not being assessed an over-the-limit fee each month and so that you don’t end up being hit with a penalty interest rate on your card.  

I know at this point, you are likely saying to yourself that you don’t have the money to do what I suggest. However, I believe you can “find” the money to do it.

One place to look for the money is in your discretionary spending. If you reduce spending on snacks, soft drinks, alcoholic beverages, eating out and entertainment, I bet you will save enough to get your balance low enough to avoid the over-the-limit fee

After you get your balance to the point where you are not being charged a fee each month, you need to work on getting your balance below 50 percent of your maximum limit. Why? Because that’s the point where your credit score is negatively affected.

There is an underlying issue I want to make sure you see: Maxing out a card so a finance charge puts you over the top is a sign that your finances are out of control. I suggest you sit yourself down and figure out where your money is going now, where you’d rather it go and then figure out how to make it happen.

As much as I wish there was a magic cure-all for paying debt, the simple fact is you have two choices: increase your income or decrease your expenses. Any sacrifices that you make now will be well worth it when you no longer have to worry about credit card debt.

You might consider seeking help from an accredited nonprofit credit counseling agency to help you get organized and come up with a plan that works for you. The best agencies do this for free and it is all confidential.

A counselor will help you plug the leaks in your household budget. If you still can’t make ends meet, a counselor may help get the interest rates lowered on your credit card accounts so more of your payment goes to the principal.

One last piece of advice: To avoid unwanted credit card debt in the future, you need an emergency savings cushion of three months to six months of living expenses.

Work regular savings into your budget, and you will be on the way to financial peace of mind.