New Credit Card Law Puts a Hold on Over Limit Charges
As you have probably heard by now, the CARD Act takes effect on February 22nd. Many of these changes are part of the law, but a lot of banks are also making voluntary changes to their programs. There are a lot of changes to help credit card users stay out of trouble and avoid ridiculous fees. Most of these changes happen automatically, but there is one thing you may have to take action on if you’d like some of the services to remain in effect.
If you have ever been in a situation where you charged something on your credit or debit card and gone over the preset limit you may remember that the charge probably still went through anyway. That’s because in the past, most cards automatically turned on features that allowed you to go over your limit rather than be declined outright. Then, you got charged a stiff fee for this feature. Card companies billed this as a convenience since they said it would be better to allow you to purchase what you needed rather than flat out decline that purchases. The problem is that you could literally spend $1 over your limit and then get socked with a $35 over limit fee.
Being over the limit is also bad for your credit score. So, by ensuring you keep your balance under the limit you can effectively improve your credit score, even if by just a few points. That could translate into lower interest rates on other loans in the future that could end up saving you thousands.
You Now Have to Opt-In For This Service
To help curb the excessive fees that credit card companies were raking in off of this service the new law now makes this an opt-in service. Going forward, you will need to call your card company and request the ability to allow overdraft or over limit coverage or charges that go over your credit card limit will be declined. This is good news for the millions of people who unexpectedly get hit with these fees for an innocent mistake, but for those who may want to keep this safety net in place, it’s one more step that needs to be taken if you want to continue to use the feature.
Keep an eye on your mail in the coming weeks if you haven’t received a notice like this from your card company already. I know most people see an envelope with the name of a bank or credit card on it and it goes right to the shredder, but it may contain important information about the features on your account and changes that are important to you.
I just received a notice from Chase regarding the debit card overdraft coverage. It states that I need to call them to turn this feature on since it is no longer offered automatically. It also outlines how it works in plain English, which is surprising considering how confusing the fine print on these things usually are. But basically, it states that:
- It’s free to turn this feature on.
- If I overdraft my checking account with a debit card purchase and make a deposit to cover it the same business day there’s no fee.
- If I overdraft my account and don’t make a deposit there will be a $35 fee for each time I use the card over the limit, up to 3 fees per day.
For me, I don’t see a need for this service, so I don’t think I’m going to bother turning it on. I don’t regularly run my checking account balance that low, but more importantly, I already have true overdraft protection set up with a linked savings account. So, if I do accidentally overdraft the checking the money is automatically pulled from savings to cover the transaction and I’m not charged $35 to do so!
But this did get me thinking about my other credit card accounts and I do think I’m going to enable this feature on our credit card reserved for emergencies. While it’s one of those things we never hope to use, if it’s a true emergency and the only option available is to use a credit card for something I think it would be nice to know that the charge is going to go through if I’m a little over the limit instead of not going through at all. I’ll probably never need it, but it’s a small insurance policy just in case. Between our emergency fund in a high-interest savings account, regular checking and savings, and credit cards, we should be adequately covered in any emergency.
Do You Need This Protection?
I’d argue that most people do not need, and shouldn’t have the option for automatic overdraft and over limit protection on their cards. If you’ve never received an over limit fee before and don’t carry a balance on your credit cards, then it might make sense to have this on one of your cards for a rare emergency like I mentioned above. But if you’re someone who’s all too familiar with overdraft and over limit fees, keeps your checking account balance pretty low, or keeps a high balance on credit cards, then you should almost certainly steer clear. You should be focusing on how you can improve your finances so that you can eliminate the need to go over your limit, not continue to make it easy to go over the limit and get hit with stiff penalties.
Instead, create your own safety net. First, establish an emergency savings account. Use this as a source of funds if there is an emergency or if money gets tight. It won’t cost you anything and your money will actually be working for you and earning interest. Next, set up true overdraft protection on your checking account. You can almost always link a checking account with a savings account to use as protection in the event you go over your account balance. In some cases this may be completely free, but some banks may charge you something like $5 to $10 per overdraft. It’s still far better than the up to $39 they can charge you now. Finally, consider getting a 0% or low-interest credit card that you can transfer one of your balances from or simply keep that card tucked away for emergencies only. This way if you do find yourself in a bind you have a source of funds that’s available and you won’t have to worry about whether or not there’s enough room on the card or worry about getting hit with a big fee for going a few dollars over.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.