Having access to credit through a revolving account, like a credit card, is beneficial to most consumers when cash flow is tight or a major expense comes out of the blue. Credit cards offer incredible flexibility to users as there are no limits in terms of what you spend your money on; there is, however, a limit to how much you are able to spend. Credit limits are used to protect credit card issuers from overextending purchasing power to individuals who may have a difficult time curbing their spending or repaying in full in each month.
Nearly all credit card issuers impose credit limits on card members, with the total available credit per individual based on his or her credit score, income, or past credit use found in their credit report. If managing credit has been a problem in the past, an initial credit limit on a credit card is typically set at a relatively low amount. With on-time payments over the lifetime of the credit card, card issuers have the ability to raise credit limits without the card user asking for it.
While having a credit limit imposed card issuers is a sound way to limit the exposure to risk credit card issuers face, there is a gray area with credit card limits that can present challenges to card users.
Credit Limits and the CARD Act
In 2009, the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) was established as federal law in an effort to curb aggressive, and often, harmful practices of credit card issuers. Under the CARD Act, consumers have certain rights when it comes to the use of their credit cards, including the following significant provisions:
- Limits to interest rate increases on existing balances
- Limits to universal default, the process of raising interest rates based on the payment records of unrelated credit accounts
- More transparency regarding credit card payment due dates and notification of payments due
- Limits to available credit offered to consumers under 21 without income verification or an adult co-signer
- The right to opt-out if issuers change terms
- Disclosures regarding minimum payments
- Limits to over-limit fees
The last listed consumer right comes with a bevy of restrictions based on the issue of over the limit transactions and associated fees. Before the CARD Act was in place, card issuers had the ability to process transactions above and beyond the card user’s stated credit limit, and if that took place, it was customary for the card user to be dinged with an over the limit fee as high as $39. If the card user was unable to repay an amount of the outstanding balance that reduces it below the initial credit limit, over the limit fees would continue to accrue, making it a true challenge to get out from under the cycle of debt.
Under the CARD Act, card issuers are now prohibited from assessing over the limit fees unless the card user opts in. This means that card issuers must give card users the ability to permit the card issuer to process over the limit transactions. In addition, card users must have the option to opt out at any time, and notification must be sent of that specific right any time an over the limit fee is assessed.
While the CARD Act provisions for over the limit spending power and fee restrictions are beneficial to consumers in theory, they have not worked all that well in practice. There’s a bit of a catch-22 with over the limit opt-ins; card issuers have no desire to experience the embarrassment or frustration of having a credit card transaction declined because they are past their spending limit, but overspending becomes a viable reality when over the limit transactions are allowed. The problem of over the limit transactions is compounded when credit card issuers fail to send alerts or notifications to card users when they are near or at their credit limit max.
How to Avoid Over the Limit Blunders
Card users who spend heavily on credit cards may find it necessary to opt-in to over the limit fees through their respective card issuers so that the aforementioned frustration isn’t a potential issue. Similarly, card members who opt-out of having the ability to complete transactions that push them over their credit limits may feel more comfortable having a built-in safety net, protecting them from overspending. Whichever camp you find yourself in, there are simple ways to avoid the over the limit issue altogether.
First, know what you can feasibly spend during each billing cycle. Whether you’re using a credit card for everyday purchases or big ticket items, work through a budget to fully understand monthly cash flow before you start swiping. Just because a credit limit is set to $5,000 or $10,000 does not mean you can – or should – spend up to the maximum. Spending in line with your means is the easiest way to ensure you don’t face the problem of overspending or have charges related to over the limit transactions.
In addition to curbing spending habits with a workable budget, work directly with the credit card issuer to protect yourself from spending too much. Several credit card issuers offer mobile and e-mail alerts or notifications which give you advanced warning if you’re coming up against your credit limit. Only a handful of card issuers (American Express and Citi, currently) give you the opportunity to set strict spending limits during a billing cycle, and some card users have experienced issues where the card issuer doesn’t enforce the spending limit accurately. Creating notifications for when your spending is getting too close for comfort to your credit limit, however, can help you steer clear of over the limit problems.
Credit cards can be a smart way to spend each month but only if you have the willpower to keep your transactions at an affordable level. Utilizing your credit limit to the full extent and maintaining a high balance from month to month has the potential to drag down a credit score and history over time, making the ability to get new credit in the future a challenge. To keep yourself out of hot water with credit limits and overspending issues, work to maintain a healthy relationship with your card and know what you can reasonably spend each billing cycle.