An Amazing Credit Card Ad
I find it amazing what banks and credit card companies will put in advertisements.
The other day I saw a commercial for a credit card offered by a well-known bank. I forget which one or I’d say. Anyway, the gist of the ad was that, due to there undying benevolence, this bank wouldn’t charge a fee for going over your credit limit.
Excuse me, but what’s a credit limit for, anyway? It’s been a while since I had to concern myself with my credit limit (though don’t think I never have had to - I did) but what are these for if you can charge stuff in excess of the limit? I guess the honest answer is “they’re a method banks use to extract more cash from consumers.”
I just don’t get it.
I also have another observation. Have you ever noticed that credit cards are an extremely competitive business in that they’ll offer all kinds of incentives to get you to sign up for one, but no one competes on price (APR)? Aside from one of those incentives in the form of a short-term 0% balance transfer or 0% on purchases for a year, that is. Why, if competition is so fierce, do banks not compete this way?
The answer lies, once again, in economic behavior. See, when people consider whether or not to sign up for a credit card, they never see themselves carrying a balance. They believe they’ll pay off their statement every month. Except, for a sadly large percentage of people, they do carry a balance, at least occasionally.
Instead of considering the actual cost of that credit, people sign up for the free t-shirt or teddy bear. It’s proximity. The t-shirt is here, now. Finance charges are only a possible outcome; and anyway, that’s months from now.
Since people don’t shop for credit cards based on actual cost, banks don’t compete on it.
Those crafty credit card companies.
December 5th, 2007 at 7:42 am
Your page is telling me that I can get 0% APR for 12 months by clicking right above the comment field.
(not that I care)
I wonder if the bank has hidden things if you go over your limit–like automatically withdrawing it from a linked account, or charging a higher APR. Or maybe they just know they’ll enjoy all the interest since you’ll have to carry a balance.
December 5th, 2007 at 3:34 pm
The fact that they don’t charge for going over your limit has little to do with the rationale for and intent of a credit limit. By them saying that they won’t charge you for going over your limit in no way implies that you can freely exceed the limit. If you have exhausted or exceeded your limit, they will most likley not approve the transaction.
Also, as Mrs. Micah pointed out, they may not charge a fee for exceeding the limit but in the fine print it is entirely possible that it would trigger a higher interest rate.
December 5th, 2007 at 7:20 pm
@Mrs. Micah - I suspect you’re right. Going over limit might trigger a higher APR. I didn’t read the details, so I don’t know for sure.
@EJD - That’s just my point. What IS a credit limit for? You can most definitely charge things after you’ve hit that limit (that is, the transaction will go through), otherwise an over-limit fee would be a moot point. The fact is, you CAN exceed your limit. So what is the rationale behind a credit limit, functionally?
December 6th, 2007 at 1:45 am
@KMC - I believe that in most cases, there are three ways that people exceed their credit limit…. transactions that are not “approved”,
- Transactions that do not get authorizations (small amounts, the system is down, whatever…)
- Timing of transactions and authorizations. I could be wrong on this, but I believe that when they get an authorization, it merely puts a hold for that amount on your credit line. If that hold expires before the actual billing goes through, then you appear to have unused credit…. I’ve had charges take over 3 weeks to get posted to my account (especially with international travel).
- The credit issuer chooses to honor the transaction.
The point I was trying to make was that people are generally not able to freely exceed your credit limit at will, but rather that there are occasional circumstances where it happens. I certainly agree that the latter of the 3 is clearly aimed at getting more $$ from the consumer.
By the way, this brings back to mind something that I was very surprised to learn a while back.
Debit Cards… these “wonderful” financial instruments that dip directly into your checking account when you make the purchase. They still go through the process of getting an authorization for the transaction and all, and one might be lulled into the FALSE impression that if you don’t have the money in the checking account, the transaction will get rejected. Once again, the banks can choose to allow the transaction and overdraw your account…. similar to them choosing to pay an overdraft check and then hit you up for overdraft fees.
I personally hate debit cards, I have never used one and never will… I’d much rather use credit (OPM) and pay it off when the bill comes in.
December 6th, 2007 at 10:56 am
@EJD - You make an excellent point about the debit cards. Similarly, banks cash checks in order of amount, largest to smallest. That way, if you exceed your balance, there is a better chance for multiple overdraft fees.
December 7th, 2007 at 3:54 pm
Re: Purpose of a credit limit
The purpose of a credit limit is to limit the exposure of the issuing bank if you default on the credit line.
The purpose of letting you exceed that limit is either “as a courtesy to the customer” or “to make money in fees and interest” depending which side of the equation you are on (or how cynical you are).
Also a debit card note: at some banks you can request that they not allow you to overdraw the account with the debit card, so that you will actually be declined if the funds are not in the account. You can still run into trouble with checks and order of transactions, but the worst of the problem can be addressed. (I still don’t like them though.)
August 12th, 2008 at 5:41 pm
You’re absolutely right some people sign up for credit cards because of some stupid freebie like a teddy bear or t-shirt, and don’t think about what’s behind. I blog about credit cards for a hobby so I think they’re great but ONLY when used responsibly. Back to what you said about credit limits, people shouldn’t even go anywhere near their credit limit in the first place. If you go above 30% of your credit limit on a card, that will hurt your credit score. Even if you pay the bill in full, the statement still closes with that balance, and that’s what is reported to the credit bureaus.