How does it happen? I pay all my bills in a timely way now, I go on line every few days and I have a plan for payment of all my debts and other bills so that I am ahead of them. But, yesterday I noticed a $39.00 overlimit fee on one of my very low-limit credit cards. I like using this card, I pay it off monthly so I never pay interest on it. If it had a higher limit, I would never be able to use it the way I do: for groceries and gasoline in order to get the U-Promise savings. I have it on the computer and I look at it regularly and make payments pretty much every week. But last week was a low money week for us, and I decided to wait until our paychecks hit the bank before I paid that bill. I checked it on Tuesday and it was $10.00 under the limit. I should have paid it then, but, it was under the limit. I checked it again to pay it on Friday, and, voila, it was $90.00 over the limit, $39.00 of which was the over-limit fee.
Now, that is just usury -- to charge a $39.00 fee for a $60.00 over limit charge. Come on! We called. We are waiting for them to remove the fee, if they do not, we have told them, and we intend to do it, that we are going to cancel the card altogether.
But it got me thinking about all the credit card offers I get for limits ranging from $300 - $500.00. They are the most dangerous cards of all. I recently read an article about how so many low income families get sucked into these cards. The annual fees, the over-limit fees, and the interest fees end up stretching families so much that they cannot afford them. Apparently, having multiple low-limit cards is one of the methods used by credit card companies to trip up the consumer. The more cards you have, the more likely you are to make a mistake, especially if such cards are not linked to one another. Thus, you might go over the limit, or pay a day late, or some other thing that automatically triggers high fees to the issuer and more debt for the borrower.
The people interviewed asked the issuer (in the case I read it was mainly Capital One), to put all the cards together for one limit: the issuer refused saying that they did not qualify for one card of such a high limit although the same people kept getting offers for new cards with low limits and outrageous fees.
What can you do to avoid this trap? Well, for one, stop getting the low limit cards. Second, pay them off, once and for all. If you cannot pay them right away, start to eliminate them one at a time. Be sure to pay on time using an automatic payment so that you cannot forget. Even if you are meticulous, if you do not keep track of all of your spending on such cards, you can end up with over-limit fees. To avoid those, keep records of what you spent on the card -- and do not forget that after a grace period, an interest charge will be assessed if you carry a balance. That interest amount could put you over the limit triggering the over-limit fee. If possible, consolidate the low interest cards into one debt -- one debt = one bill and less opportunity to make a mistake. Finally, you can try to link your card to other cards that have credit remaining -- this can avoid the over-limit fee on one card.
The moral of the story is that too many credit cards are a recipe for disaster. I know the temptation is great -- this card will help us to pay off that card, etc. But, it is too easy to make a mistake: if you go over the limit, and they let you do it, they can charge you more than your minimum payment that month to get back down to the limit. Also, another way to go over the limit is to charge up to the limit. When they add the interest, you will get socked with an over-limit fee.
So, if you are paying down your debt, get rid of your small debt first (there are other ways to decide what to eliminate, see, "Which Debt Should I Eliminate First?"). This type of debt carries too much risk of ending up costing you loads of fees and is simply not worth having.
P.S. To its credit, Citibank credited back the over-limit fee a few days after we called. I am keeping even more careful track of that card for the future.