This article was updated on June 23, 2018.
Thousands of financial institutions offer credit cards, and the industry is interested enough in bringing in new customers that it's easy to get a credit card if you want one. Even those who have questionable credit histories can typically get some type of credit card. But in choosing a card, you have to bear in mind the different credit card fees that card issuers will charge you. These fees are how credit card companies earn a profit, but there's really only one good reason why you should ever pay any of them: to get card rewards and other benefits that are more valuable than what you pay.
Dealing with credit card fees
Credit card companies have been ingenious in coming up with different fees to charge their customers. Get a credit card, and you could end up paying any of the following types of fees:
- Finance charges apply when you carry a balance on your credit card. The interest rates on credit card finance charges tend to be extremely high, with double-digit percentages not unusual even in the current low-rate environment.
- Some cards charge annual fees just to have the card. Regardless of whether you use it, you'll pay this fee every year.
- Late payment fees occur when you miss the payment deadline on your card.
- You'll often have to pay a returned payment fee if your monthly payment doesn't go through for some reason, such as insufficient funds in your account or a bank error.
- Card issuers charge over-limit fees when you try to charge more than your credit limit.
- If you use your card abroad, you might pay a foreign transaction fee of up to 3%.
- Those who use their credit cards to get cash advances typically have to pay separate fees for the privilege, along with interest accruing from the date of the advance.
- If you make a balance transfer, many cards charge a percentage of the amount transferred to your card.
However, most of these fees are completely within your control to avoid. If you pay off your balance every month, you'll never have finance charges. Pay on time and you'll avoid late payment and returned payment fees. Pay attention to your credit limit to avoid over-limit fees, and use cheaper sources for cash advances while avoiding transferring balances to a card.
Indeed, just about the only fee you can't avoid with some cards is the annual fee. And with that charge, the big question is whether the card company will make it worth your while to pay it.
Getting more than you pay for
The key question with a card that charges an annual fee is whether the rewards you get from using it outweigh the cost. That will often be the case, but it depends on what the card offers and how much you can take advantage of its provisions.
For example, American Express (NYSE:AXP) offers two types of its Blue Cash card. The Blue Cash Everyday card has no annual fee and offers up to 3% cash back on grocery purchases of up to $6,000 annually. The Blue Cash Preferred card, on the other hand, charges an annual fee of $95 but boosts the grocery cash-back percentage to 6%.
It's easy to do the math and decide whether it makes sense to pay an annual fee. If you spend $500 on groceries every month, then you'll max out the benefit. On the preferred card, that amounts to a $360 cash back reward. For the everyday card, you'd only get $180. Even after paying $95 for the annual fee, the net cash back on the preferred card amounts to $265 -- almost half again as much as what you'd get on the everyday card.
For other cards, perks can vary even more between different people. For instance, many airlines now offer cards that give you a free checked bag when you fly. With round-trip baggage fees of $50 or more, it takes just two trips to pay for the $95 annual fee that you'll typically find with such cards.
Be smart about your credit
Credit card companies profit because customers aren't always smart about how they use their cards. But you don't have to fall into that trap. By being smart about avoiding fees, you'll only pay a card company for a credit card when they make it worthwhile for you to choose them over all the other cards available to you.