Over-Limit Fees

Most revolving or open-end credit card come with a credit limit. This limit can be as low as $250 and as high as…well, they can be unlimited but most standard cards peak at around $40,000.

Many consumers would expect their credit card to be declined if a transaction would put the card over their credit limit. But, increasingly, credit card companies are allowing these transactions to go through, then slapping consumers with an over-limit fee of $20, $25 or more.

This isn’t necessarily a one-time fee, either. If your card balance remains over the limit, you’ll get stuck with this fee every month until you pay down the balance sufficiently.

Sharon Pfennig was angry enough about the late fees assessed on her credit card to sue the companies that provided it (Household Credit, which issued the card, and MBNA, which later purchased all of Household Credit’s accounts). Particularly irksome: Pfennig had asked the credit card company to extend her credit limit so that she could make a purchase. The company agreed, but stuck her with an over-limit fee anyway.

In addition, the company did not include the over-limit charges in the finance charge on her bill. Instead, they posted the fee as a debit—and then proceeded to include it in the outstanding balance, so they charged interest on the fee as part of the monthly finance charge.

That frustrated Pfennig, who alleged “that the foregoing results in an exorbitant penalty that often amounts to an annual percentage rate of nearly 60 percent on credit extended over the limit.”

Now that’s a penalty rate.

Credit card companies don’t have to include any mention of over-limit fees or late fees in the Schumer box. You’d think this would be required, since TILA defines “finance charge” as:

…the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit.

Certainly, late fees and over-limit fees are imposed by the creditor and payable by the person to whom credit is extended. But they fall into a loophole that’s handy for the credit card companies and irritating for consumers. The loophole is part of Regulation Z, which was created by the Federal Reserve Board (FRB) as part of its efforts to make TILA practical in daily business.

Regulation Z defines finance charge, and it excludes “charges for actual unanticipated late payment, for exceeding a credit limit, or for delinquency, default, or a similar occurrence.”

In Pfennig’s case, the United States Court of Appeals for the Sixth Circuit agreed that the over-limit fee clearly was a finance charge.

Another way consumers sometimes get stuck with over-limit fees is by transferring a balance when they open a new account. In this case, the credit card company provides a lower limit than the consumer expected—while still transferring as much of the balance from another card as possible.

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