Why credit card over-limit fees are going extinct

Credit card over-limit fees, charged for maxing out your account, once cost consumers billions of dollars a year. But they barely exist anymore, and one financial regulator even calls them “essentially extinct.”

But that doesn’t mean exceeding your credit limit isn’t a problem. It invites plenty of trouble beyond the embarrassment of a clerk handing you back your card at the checkout with a disapproving or sympathetic look. Potential effects can include punitive interest rates, a hit to your credit score, lost rewards or even cancellation of your account.

Here’s what you should know about over-limit fees and what happens when you bang into your credit card’s ceiling.

Over limit: The dodo of credit card fees

Credit card issuers used to be able to charge you automatically for going over your limit. If you exceeded your credit line, the issuer might still cover the charge, but you’d get hit with a fee. That changed with the federal Credit Card Act of 2009. Cardholders now must opt in to over-limit coverage and the fees that come with it.

Some issuers still market the opt-in as a way to avoid being shamed when a merchant declines your card for blowing past your spending ceiling, or as an emergency credit line. But many card issuers gave up and eliminated over-limit fees. American Express, for one, hasn’t charged them since 2009.

How rare are over-limit fees now? The Consumer Financial Protection Bureau calls them “essentially extinct.”

Just 0.0008% of active accounts through mid-2015 were assessed an over-limit fee, based on the latest quarterly averages released by the CFPB. That’s fewer than 1 in every 100,000 accounts. The CFPB estimates, conservatively, that the decline of over-limit fees saved consumers $9 billion from 2011 to 2014, compared with what they would have paid based on 2008 levels of over-limit charges.

What if I charge more than my credit limit?

Credit card over-limit fees are mostly gone, but that doesn’t mean banks let you exceed your spending cap without consequences. It just means they deal with it in other ways. For example, your card issuer could:

• Decline a transaction. Your card can be declined when you exceed your limit. This can apply not only to purchases but also to balance transfers and cash advances.
• Force you to pay sooner. Issuers may ask you to pay the amount by which you’ve gone over your limit. They might even require you to pay the full balance on the account. And they may require you to pay immediately, rather than on your normal due date.
• Reduce your credit limit. Often, issuers have full discretion on this anyway.
• Raise your interest rate. Depending on your cardholder agreement, you could end up paying a penalty annual percentage rate.
• Cancel your card. Chronic overcharges could result in the lender closing the account.
• Take away rewards. You could lose the cash back, points or miles you’ve accumulated on a rewards card. When you exceed your credit limit, you’re violating your cardholder agreement, which can cost you your rewards.
• Set a higher minimum payment. You can expect your issuer to add the whole amount by which you exceeded your limit to your next month’s minimum payment. That will get the balance back under the limit.
• Do nothing. A card issuer could decide to let it slide. Maybe your credit profile or payment history suggests you’re reliable enough that the issuer can forgive a mistake. But even if you get away with it once, don’t assume you can do it again with impunity. Issuers are clear in the fine print of their cardholder agreements that failing to take action in one case doesn’t prevent them from doing so in another instance.

Nerdy Tip: Some cards have different credit limits on the same account — for purchases versus cash advances, for example. That can result in consumers unwittingly exceeding a limit.

If you’re one of the rare birds who opt in to over-limit fees, you generally can be charged up to $25 the first time you exceed your credit limit. That rises to $35 for a second infraction within six months. The fee can’t be larger than the amount by which you exceeded your credit limit.

It could show up on your credit report

Exceeding your limit can become a problem on your credit reports, too.

• It could affect other accounts. Lenders can report to credit bureaus when you exceed your limit. “Some lenders may decrease your credit limits or increase your interest rates if an over-the-limit status appears in your credit history, so it could affect more than just that one credit card,” the Experian credit bureau notes on its website.
• Credit utilization takes a hit. Credit scoring models generally penalize you for using a large portion of your available credit, both overall and on a per-card basis. So your score may fall just from approaching your credit limit, let alone maxing it out. In general, it’s wise to keep your balances below 30% of your available credit.

Tips for managing your credit limit

• Don’t opt in to over-limit “protection” unless you think the ability to charge past your limit is worth the fee. If you already opted in and are charged a fee, ask for it to be waived. Then opt out of the over-limit fee.
• Stop spending on the card and pay it down, submitting multiple payments per month if you need to.
• Know your limit and sign up for balance alerts, which will warn you when you get close to it.
• Get a spare credit card before you need it, so you have credit breathing room. Or move your balance, or part of it, to a balance transfer card, which charges no interest for a set period.
• Stash cash in an emergency fund so life’s surprise expenses don’t land on a credit card.
• Request a credit line increase on the card, even a temporary one, before you exceed your current limit.

Gregory Karp is a staff writer at NerdWallet, a personal finance website. Email:gkarp@nerdwallet.com. Twitter: @spendingsmart.

This story originally appeared on NerdWallet.