Next time you brush past your credit limit you may get hit with more than a hefty over-the-limit fee. The Red Tape Chronicles reports that credit card companies are starting to slap exuberant spenders with penalty interest rates. Compounding the danger to consumers, creditors are simultaneously rushing to slash credit limits.
Discover is the new cheerleader for penalty APRs and plans to asses rates of 31% on top of their $39 over-the-limit fee. Other creditors are rushing to get in on the action, too:
One Chase Platinum Visa offer indicates the cardholder’s rate may increase if “you exceed your credit line.” At Bank of America, a cash reward card contains the following provision: “Each time your … account balance is over the credit limit, we may increase each of your account’s Standard APRs up to the default rate. “
Getting hit with the default rate is a credit card user’s equivalent of banishment – and it’s a costly one. A consumer with a $10,000 balance and a 15 percent interest rate who pays the minimum payment each month would pay $2,800 in a year and still owe $8,598 on that balance. But a consumer paying 31 percent interest would have to cough up $4,047 to meet minimum balance payments during that same 12 months, and yet would fall farther behind, with a remaining balance of $8,891.54.
Remember, in that example, nothing has changed but the interest rate. (If you’d like to run your own nightmare scenarios, BankRate.com has a handy calculator).
Brushing your credit limit can also impact your credit score, which considers what percent of your credit limit is actually used. Next time you’re planning for a large purchase or a series of small mistakes, remember that your ideal credit utilization is somewhere around 10%.