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Most credit cards calculate interest at the end of the cycle and add it to the balance: this reduces the available credit. As an extreme case, when this goes over limit the cardholder is required to make a larger than normal payment to bring it back down.

I know of a credit union credit card that does it a little differently by not counting interest against the card limit. Naturally interest is still deducted from payments and the principal portion is applied to the balance which become available credit again. For the extreme scenario, the minimum payment does not increase as it did above, at least not when the "overlimit" is due to new interest.

I once looked at the agreements to find where this accounting is defined but had no luck. So my questions:

Do these concepts have names?

Is this common among credit unions?

Is this generally limited to credit unions, being that they're more consumer-friendly?

Is interest receivable handled differently in the books of two creditors or is this just a matter of calculating available credit and minimum payments in slightly different ways with no difference behind the scenes from an accountant's perspective?

Are there any regulations on this topic worth noting?

Edit: I am asking strictly out of curiosity. Please do not presume this indicates a lack of credit responsibility on my part. The overlimit detail is not really even fundamental to the question except that I think it might be insightful about the credit union's perspective.

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    Probably not. Disclosure regarding interest is heavily regulated, but this nuance, not counting accrued interest against available credit? I doubt it. Interesting question, welcome to Money.SE. – JoeTaxpayer May 28 '16 at 18:03
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    if your monthly interest charge is enough to put your over your limit, you have bigger problems. I've never heard of interest not counting toward your balance/limit. – quid May 28 '16 at 19:26
  • @quid I hesitated to include the detail about overlimit payments to avoid shifting focus toward money management concerns. But I think it does reflect a different attitude on the creditor's part in the way they approach business. – shawnt00 May 28 '16 at 19:36
  • A difference that makes no difference is no difference -- and I agree this one should never make a difference. – keshlam May 28 '16 at 20:11
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    @keshlam My apologies if my question is misleading somehow. But there's nothing hypothetical. I do in fact know a person who has used this knowledge when finances were tight. That's not what my questions were about though. It may have been more appropriate to find an accounting-focused forum. Thanks for your input! – shawnt00 May 28 '16 at 22:30
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I'm not sure you're reading the disclosure properly, because I personally have never heard of any credit card issuer who doesn't count accrued interest against a card's available line of credit. It's worth contacting the credit union for clarification on this, because it's an important issue, especially if you plan to carry a large balance from month to month when the interest could have a significant impact on your remaining available credit.

As for exceeding the card's limit, it is almost universal (I say "almost" because I'm sure that certain creditors make exceptions for particular customers) for creditors to beat you up for over-limit fees, even when it is the addition of accrued interest that takes you over the limit.

As someone else here noted, if you're concerned about interest taking you over the limit then you have bigger problems. Utilization rates of available credit above 25% or so begin to have significant negative effects on your credit score, because it gives the appearance that your income isn't enough to cover your bills and you're making up the gap with your credit cards. That's a huge red flag to other creditors.

Something else to keep in mind is that creditors watch how you use credit with other creditors, and if you're consistently near or over your limit with one bank/creditor then other banks/creditors may reduce your line of credit to mitigate their risk or they may raise your interest rates on their credit lines. This is legal, and it's buried in the arcane language of your account disclosure.

It always worries me when people are talking about how much credit they can get/use, because it means they're struggling somewhere to manage their money properly, and they're trying to make it up using new credit. This is robbing Peter to pay Paul, and it becomes a debt treadmill you can't get off.

Nothing that happens with your credit occurs in isolation. Your insurance rates vary (to one degree or another) on your credit score, as do many other things that people don't realize. Staying close to the edge of your credit lines is costing you money in ways you don't even know, so it's best to pay down your cards, keep them under control, and then you can stop thinking about what happens if you go over limit.

I hope this helps.

Good luck!

  • Data point from my experience: some creditors have the option for you to prevent over-limit fees by declining charges that would exceeding the limit. The ethical conflict is that they claim allowing the member to exceed the limit is for the customers' convenience. I prefer the opportunity to avoid a fee or having my APR increased. – Chris K Oct 20 '16 at 16:30

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