Beginning May 1, Discover will penalize its card holders for exceeding their credit limit twice by imposing the "penalty interest rate" (which, not surprisingly, is being raised from 29% to 31%). This action is in addition to the $39 over-the-limit fee Discover already charges.
Discover is not the only card issuer that is instituting rate increases for exceeding credit lines – Chase and Bank of America are including similar clauses in their member agreements.
According to calculations by The Red Tape Chronicles, affected customers will pay heavily for going over their limit:
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.
A consumer with a $10,000 balance and a 31 percent interest rate who pays the minimum payment each month would pay $4,047 in a year and still owe $8,891.54 on that balance.
If you are a regular user of credit cards, you should know that credit card issuers generally allow you to exceed your credit limit by 10 percent or more without warning. Credit card companies say they do this to prevent embarrassment or inconvenience in the check-out line. But with these stiff new penalties in place, you will pay for years for the privilege of using more credit than you have.
To maximize your credit score, you should not be charging more than 10 percent of your credit limit anyway, because of the negative impact of a debt utilization ratio. Know your credit limit. Stay below 50 percent of your limit (10 percent if possible). And if your credit card company offers e-mail warnings to let you know that you are approaching your credit limit, sign up today.
