Credit cards are one of the great conveniences of modern life; but the cost of using them can quickly add up.
Even the most cautious cardholder can get tripped up from time to time by the multitude of fees that are triggered each time you pull out your card. Here is a guide to the 5 most common credit card fees that cardholders incur — and how to avoid them.
1. Annual fees
Annual fees are yearly fees ranging from $15 to $300 or higher, which cardholders pay for the privilege of having their credit card. Not all credit cards charge an annual fee; but nearly all rewards cards, premium cards and secured credit cards do. The fee is most commonly applied to the cardholder’s account during a specific month of the year; but for secured credit cards, they may also be charged in monthly installments.
Why many cardholders get tripped up by this fee: Why would anyone apply for a credit card with an annual fee when they can easily get a card without one? There are two main reasons. In the case of rewards cards, credit cards with an annual fee typically offer higher rewards benefits or special sign-up bonuses.
Most card issuers will also waive the annual fee for the first year in order to sweeten the deal. Many cardholders, in turn, take out the card with the intention of canceling it after the first year; but then they forget.
How to avoid this fee: Before taking out a rewards card with a high(er) annual fee, do the math to make sure the extra rewards benefits really are worth it. In most cases, you’ll find that the extra earnings don’t warrant the higher annual fee. Furthermore, if you take out a card with the annual fee waived the first year, and you intend to cancel it, make a note in your calendar so that you don’t forget. Even if the annual fee is charged to your account, you can cancel it at any time and get a prorated refund.
2. Balance transfer fees
Balance transfer fees are charged each time a cardholder transfers a credit card balance to a different credit card or uses a balance transfer check. The fees range from 3 to 5 percent of the balance transferred. Balance transfer fees used to be capped at, say, $75 or $100; but such offers are harder to come by these days. This has changed the dynamics of 0 percent balance transfer offers quite a bit. For example, now, if you take out a $5,000 0 percent balance transfer on a typical card, you can expect to pay a $150 to $250 balance transfer fee.
Why many cardholders get tripped up by this fee: A 0 percent balance transfer offer sounds like a great deal, even with a “low” 3 to 5 percent balance transfer fee. However, how good a deal it is really depends on the length of the promotional 0 percent offer period. For a six-month 0 percent balance transfer offer with a 5 percent balance transfer fee, the effective annual interest rate is 10 percent. Not such a great deal after all.
How to avoid this fee: It’s hard to avoid balance transfer fees altogether, as few card issuers these days offer no-fee 0 percent balance transfers. Instead, look for offers with the longest possible promotional period (ideally, 12 to 18 months). For a 0 percent balance transfer offer with a 5 percent balance transfer fee, the effective annual rate for an 18-month promotional period is a modest 3.33 percent. An alternate option is to put all purchases on a card with a 0 percent purchase rate and use the cash saved in lieu of a balance transfer.
3. Cash advance fees
Cash advance fees are charged each time cardholders take out cash from their credit cards via bank tellers, ATMs or, in some cases, the convenience checks card issuers send out. The fee is typically 3 percent of the amount withdrawn. Cash advances are very handy for getting quick access to cash when traveling or running short on money in your regular bank account; but they can also be dangerous.
Why many cardholders get tripped up by this fee: With a 3 percent cash advance fee, the cost of, say, a $100 cash advance is very modest: just $3. However, many cardholders don’t realize that the costs don’t end there. The credit card interest on cash advances is higher than for other types of balances, typically ranging from 21.99 to 25.99 percent or higher. There is also no grace period on cash advances, so interest begins to accumulate right away.
Furthermore, when the monthly bill is paid, card issuers first apply payments to balances with the lowest APR (for example, the purchase APR). Only the amount paid above the minimum due is applied to the balances with the highest interest. So cardholders who pay only the minimum due will end up paying interest on high APR cash advance balances for a long time.
How to avoid this fee: Exhaust all other options before taking out a cash advance on a credit card. Furthermore, when taking out a cash advance, pay the entire credit card balance off as quickly as you can to wipe out the high interest balance on the card.
4. Late fees
The rules for how much card issuers can charge in late fees have changed since the Credit CARD Act was passed in 2009. In the past, card issuers typically charged a late fee of $39. Now, the late fee can not be higher than the minimum payment due. If the payment due is higher than $39, the late fee is capped at $25, unless the cardholder has made another late payment in the last six months. In this case, the fee cannot exceed $35. The fee can be higher if the card issuer is able to demonstrate that the costs incurred from the late payment were more than $25; but card issuers would have to disclose those higher penalty fees up front.
Why many cardholders get tripped up by this fee: Life happens. If you’re traveling, busy with a work deadline or something unusual happens in your life, it’s all too easy to miss a bill payment. However, when it comes to credit cards, one trip-up can seriously cost you.
Whereas most bills can wait past the due date without serious consequences, credit card bills are a different story. Even though the late fees are lower, they are still considerable. And if you are more than 30 days late paying your bill, it will seriously damage your credit score.
How to avoid this fee: The more credit cards you use, the easier it is to overlook a credit card payment. Use only 2-3 credit cards at the most, and synchronize credit card payments so that you don’t have to keep track of multiple due dates.
5. Over-limit fees
Over-limit fees have gotten a lot of attention recently, thanks to new regulations that require consumers to “opt-in” for credit card overdraft protection if they want to charge over their credit limit without having their card declined. As with late fees, card issuers can no longer automatically charge the typical $39 over-limit fee. The fee can’t be any higher than the overdraft amount.
Why many cardholders get tripped up by this fee: In the past, it was possible to incur numerous over-limit fees if a cardholder used his cards multiple times before realizing the card was over the limit. With the CARD Act’s new rules, cardholders enjoy protection against this slip-up. However, the greatest cost to cardholders is not the fee, but the damage to their credit score that is incurred by pushing credit card balances to the limit.
How to avoid this fee: This is one fee that is now easy to avoid: Don’t opt in for over-limit protection. In addition, to avoid damage to your credit score, keep credit card balances below 30 percent of the credit limit, and ideally use only 10 percent of the credit available.