Discover, American Express: Eliminate one fee, raise another

Beginning in October, American Express and Discover will eliminate the over-the-limit fee, a major charge that affects millions of consumers. The $35-$40 fine, which kicks in when customers exceed their credit limits, has been in use for about 25 years. It is one of many charges that was targeted by April's Credit Card Accountability, Responsibility, and Disclosure (C-CARD) Act.

Although it dealt with numerous aspects of the credit card industry, C-CARD specifically attacked this fine in several ways. The law allows customers to stop payment on any charges that would result in an over-the-limit fee, only allows banks to charge the fee once during a given billing cycle, and prohibits them from charging it in two consecutive cycles -- unless the cardholder has gotten another extension in credit. Effectively, this keeps card companies from repeatedly fining customers for the same over-the-limit charge.

Perhaps most important, the law only allows an over-the-limit fee when the cardholder overspends. This is hugely important, as many card companies fine customers for one infraction, then use the fine to claim that the customers are over their limit, after which they can tack on another fine. Effectively, this will translate into a situation whereby card companies can't charge customers an over-the-limit fee unless the cardholder specifically requests an extension of credit.

While many cardholders will rejoice about this move, there is bad news as well. To begin with, American Express and Discover probably chose to eliminate the fee because it would be too difficult to create a system in which customers could agree to accept a charge for exceeding their credit limit. Many other credit companies will probably take the latter route. The simple truth is that fees have come to occupy a major part of the credit card profit structure.

In the 1980s, many banks began to institute the fees as a means to offset the cost of overspending. However, as one might expect, they soon discovered that the fees were, themselves, a major source of income. In the ensuing decades, banks have increased the fees and levied them for an ever-expanding host of activities.

C-CARD, which was designed to put a damper on the fee-addicted companies, may only succeed in forcing them to shift their fee structure. American Express has already informed cardholders that it will raise late fees and interest rates, and Discover is likely to follow suit.

However, even if this fee reduction doesn't mark the end of credit card usury, it still represents one less fee that many customers will have to pay. And, even if that isn't everything, it is still a very good thing.

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