Are you stuck in a monthly cycle of over-the-limit fees even though you're paying your balance below the credit limit each month. Read on and I'll explain why this happens and how you can stop it.
An Explanation of Your Credit Limit
Your credit card came with a maximum limit that you can charge without receiving a penalty. This is called your credit limit. Even though the credit card company has told you not to go over the credit limit, they won’t stop you from going over.
Most people think their credit card will be denied when they make a purchase that will put them over their credit limit. Unfortunately, this isn’t the case. Any purchases over your credit limit will go through as if they were under the limit, causing you to incur an over-the-limit fee.
When you get your next statement in the mail, it will include a minimum payment that is just enough to put you under the credit limit. If you send in this payment, you’ll see that the balance on your next statement is also over the limit. You’ll be stuck in a continuous loop of over the limit charges until you do something about it.
Why Do You Keep Getting Over the Limit Fees?
Let’s say your credit limit is $1,000 and you went over the credit limit by $25 and got charged a $39 over-the-limit fee making your balance $1,025. Your billing statement included a $69 minimum payment which would bring your balance to $995.
Even though you didn’t make any new purchases with the credit card, your next statement has a new balance that is also over the credit limit. Why?
After you made the $69 payment, you got charged a $12.81 finance charge (assuming your interest rate is 15.9% and your card uses the average daily balance method). That brought your balance to $1007.81 which is again over the credit limit. You’ll also get another $39 fee.
So, you see, even though you made a minimum payment that put you below your credit limit, the finance charge applied during the billing cycle put your balance back over the limit.
How to Get out of the Fee Trap
Putting an end to those continuous over the limit charges is easier than you thought. All you have to do is make a payment that’s higher than the minimum.
The payment you make needs to be high enough to cover the finance charge you’ll get charged during the billing cycle. Using the example above, you could have made an $82 payment and kept your balance below the credit limit, even after the finance charge was applied.
If you have a balance that’s over the credit limit, it’s another reason to make a payment that’s more than the minimum. Otherwise, you’ll find yourself paying over the limit fees every month until you finally pay the balance down far enough negate finance charges.
