Editorial Policy

3 Credit Card Leaks and How to Fix Them

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By Eva Norlyk Smith, Ph.D.
July 8, 2009

Credit card companies rake in more than $15 billion a year from fees alone, including late fees, over-the-limit fees, cash advance fees, and so on. That’s before the interest charged on Americans’ almost $1 trillion in revolving credit card debt, which earns interest at rates ranging from around 8.99% to a sweet 32.99% APR.

Paying interest on credit card debt over a short period of time makes some sense if you simply need a short-term bridge loan—at least you’re paying interest in exchange for a service. However, most of us end up paying for credit card “services,” which we don’t get any benefit from.

Is your credit card leaking money from your wallet? Here are three common leaks and how to fix them:

1. Frequent ATM Withdrawals. According to industry estimates, the average credit card holder withdraws money from ATMs four times each month with an average of $250 in monthly withdrawals.

ATM withdrawals have three strikes against them. First, if you don’t withdraw from your own bank, ATM transaction fees at $1.50 to $3 a pop can add up to $72 to $144 a year. Second, ATM withdrawals using credit cards are treated as a cash advance, so you’ll pay a 3% cash advance fee—in our example amounting to $7.50 a month, or around $80 a year on top of the ATM fee.

To top it off, the APR charged on cash advances is generally much higher than the purchase APR, often at around 21.99%. Credit card companies apply payments to the balances with the lowest APR first, so if you carry a balance over from month to month, the cash advance balance will stay on your account earning high interest charges until the entire balance is paid off. Over a year, the added interest costs could end up costing you several hundred dollars more in interest charges each year, depending on how much cash you take out.

Adding it all up, those ATM withdrawals can easily make $300-500 leak out of your wallet every year. However, it happens in such small increments that you won’t have a clue.

How to Fix: Withdraw the exact amount of cash you’ll need each week from your bank. Only take out cash advances in emergency situations.

2. Late Fees and Over-the Limit Fees

It’s an easy slip-up. Put that credit card payment in the mail a day too late or draw your card too close to the limit and, wham!, you’re slapped with a punitive late fee or over-the-limit fee to the tune of $29 or higher. Repeat that mistake several times a year, and it quickly adds up.

How to Fix: Sign up for an online account with your credit card company, if you don’t already have one. With an online account, you can pay your credit card bill online, so that payments are applied to your account the same day they are submitted. In addition, you can check your credit card transactions online regularly, so you always know what the balance is.

3. Paying Annual Fees on Credit Cards

Annual fees are almost a thing of the past, but some frequent flier or “high-end” credit cards with added services still charge annual fees ranging from $39 to a whopping $450.

Rewards credit cards or frequent flier cards with an annual fee make sense only if you charge enough to more than earn back the annual fee in rewards. The value of rewards (including frequent flier miles) is often estimated to be, on average, the equivalent of about 1% cash back. So, for a card with for example a $90 annual fee, you’d have to charge $9,000 on the card just to earn back the annual fee.

How to fix: Credit cards with annual fees are dinosaurs of the past. If you’re holding on to a credit card with an annual fee, just because you’ve had the card for a long time and have gotten used to it, save yourself some money and look for a better credit card deal.

There are many other ways that credit cards will cost you more than they need to. For example, paying only the minimum monthly payments is one of the most expensive credit card habits, which could cost you thousands of dollars over time. However, unlike interest charges on credit card debt, most credit card fees are entirely avoidable.