Posted by Mike Smith :: May 5, 2008 @ 8:00 am

You would think that your credit limit would do just that: limit your credit to a certain amount. In many cases, a credit limit is just a threshold above which fees and other penalties begin to accumulate.

Just as you would expect a debit card purchase to be declined if there were insufficient funds in your account, you probably expect that any credit card purchase that would put you over your credit limit would also be declined. In many cases, neither is declined anymore. Instead, such transactions are used as trigger points. In each case, card issuers are likely to allow the transaction to occur and then hit you with a fee for the convenience of letting the transaction get approved. Personally, I'd prefer the "embarrassment" of having my card declined than the fees and interest for the convenience of it being approved.

As if that wasn’t bad enough, Discover card recently changed its terms of use so that exceeding your credit limit twice will cause your interest rate to be reset as high as 31%. Discover counters that the fees and interest rate hike only occur if the bill is not paid by the due date. That makes it seem like it’s the cardholder’s fault. Obviously cardholders do share some blame if they both exceed their limit and pay their bill late. The problem is that so many of us assume that purchases exceeding our credit limit would be declined. As such, seeing a successful transaction might not even register as having exceeded the limit.

Discover’s new policy aims to exploit those who can least afford higher interest and fees. Anyone carrying a balance near their credit limit is likely living beyond his or her means. Higher interest rates would be detrimental to any balance, but hits hardest when the maximum balance is reached.

More than anything else, this new policy is an indication that we all need to pay closer attention to our credit limit. We can no longer assume that over-limit transactions will be declined. If you can’t state your credit limit from memory, take a few minutes to check your latest statement so that you clearly know your limit. A small investment of your time could end up saving you a lot of money.