Every credit card charges some fees, but they're nearly all avoidable if you choose the right card and use it responsibly. By looking at your spending habits, you can determine which fees you need to watch out for to prevent yourself from racking up unexpected charges.
Here are the details on eight of the most common credit card fees, along with advice on how to steer clear of them.
1. Annual fees
An annual fee is simply a yearly fee that you pay for the privilege of owning the credit card. There are two types of cards that usually charge annual fees: subprime cards for those with poor credit (a credit score of 670 or less) or no credit history and premium credit cards that offer generous rewards. Annual fees can cost anywhere from $30 to over $500. They may be charged as monthly payments throughout the year, but a single annual charge is more common.
There are two instances in which you may want to consider signing up for a credit card with an annual fee. The first is if you're interested in a premium credit card and you know you'll earn enough rewards each year to make the fee worth it. Look at how much you spend each year and try to estimate how many rewards points you'll earn based on the card's rewards-earning rate. Then compare this to the annual fee to see whether you'd come out ahead.
And if you have no credit or poor credit, then you may have no choice but to pay an annual fee, which helps to mitigate the card issuer's risk that you'll fail to pay back what you borrow. There are some subprime credit cards that don't charge annual fees, but they are rarer and often make up for that with higher APRs. If you do go with a subprime credit card that has an annual fee, you should note that this amount comes off your monthly credit limit and thus lowers your purchasing power.
If your credit is over 670 and you're just interested in a run-of-the-mill rewards card, then you certainly don't need to pay an annual fee. There are plenty of no-annual-fee credit cards to choose from. Read the cardholder agreement or visit the credit card's website to check whether the card has an annual fee. Some cards waive this fee for the first year but charge you every year thereafter, so be sure to read the fine print.
2. Finance charges
All credit cards make you pay a finance charge if you carry a balance from month to month. The exact amount will vary depending on the card's APR, and that APR will be based partly on your creditworthiness.
APRs range from under 10% to over 30%, and the higher the rate, the more you'll pay in interest if you carry a balance. Some cards may offer new cardholders a 0% introductory APR for a set number of months before switching them over to its standard APR. Subprime credit cards often have the highest APRs because of the increased risk of lending money to these individuals.
Some credit cards charge different APRs depending on what you're using the card for. The standard APR applies to purchases, but there may be separate -- and possibly higher -- APRs for balance transfers and cash advances. Some cards will also charge you a higher penalty APR for a few months if you fail to make your payments on time. Make sure you read through the cardholder agreement before signing up so you understand how much you'll pay in finance charges in each of these situations.
Fortunately, there is a simple way to avoid all interest charges: Pay your balance in full each month. Not only will this save you money, but it will also help to raise your credit score by showing that you're responsible and living comfortably within your means.
3. Balance transfer fees
If you're transferring a balance from one credit card to another, you will usually have to pay a balance transfer fee. This is often 3% to 5% of the amount being transferred. So if you were transferring $1,000, you'd have to pay between $30 and $50 to do so. Keep in mind that you'll also have to start paying interest on this balance at your new card's balance transfer interest rate unless you're in a special 0% interest period for balance transfers.
You won't have to worry about this fee as long as you stay out of credit card debt. If you're planning to transfer a balance, however, then pay close attention to this fee. Make sure the amount you're saving in finance charges is worth what you're paying in balance transfer fees. Or better yet, go with a card that doesn't charge any balance transfer fees.
4. Cash advance fees
Most credit cards enable you to borrow against your credit card in exchange for cash. This is known as a cash advance. Like balance transfers, cash advances come with special fees that are usually a percentage of the amount you're withdrawing. Most credit cards charge you between 2% and 5% of the borrowed sum, but many also have a minimum dollar amount in place.
Say you borrow $500. You'll have to pay an additional $15 back to the credit card company, assuming there's a 3% cash advance fee. If you only borrow $100, 3% would only come out to $3. But most companies have a $5 or $10 minimum fee for cash advances -- and that's before you factor in ATM fees and an elevated APR for cash advances.
You can avoid cash advance fees simply by not taking cash advances. Build up an emergency fund instead, so you don't need to borrow any money if unexpected expenses arise.
5. Foreign transaction fees
If you regularly travel outside of the country, look for a credit card with no foreign transaction fees. These are fees that many card issuers charge if you use your credit card in another country. It's usually a percentage of the amount you spend; most companies that charge these fees set the bar at 3%.
You don't have to worry about foreign transaction fees if you rarely leave the country. If you do travel often, there are plenty of cards that don't penalize you for purchases made abroad.
6. Late payment fees
You'll incur late payment fees if you fail to make your payments on time. Under the latest regulations by the Consumer Financial Protection Bureau (CFPB), the most your card issuer can charge you for your first late payment is $27. But if you're a repeat offender, you can be charged up to $38 for any late payment that occurs within six months of the first. You may also be subject to a penalty APR, which could end up costing you a lot more in interest if you carry a balance.
Paying your bill on time every month will help you not only avoid late fees, but also keep your credit score high. Consistently late payments are a red flag to creditors, signalling that you may not be responsible with your money.
7. Returned payment fees
If you don't have enough money in your bank account to pay your credit card bill, you'll be charged a returned payment fee when the check or automatic payment bounces. Usually, this amount is similar to a late payment fee, maxing out around $38 per instance. If it's your first returned payment, your card issuer may be a little more forgiving. A returned payment could also result in a non-sufficient-funds fee from your bank and a penalty APR from your card issuer. But you don't have to worry about being charged a late fee on top of a returned payment fee.
You should always make sure you have enough money in your bank account before submitting a payment so you don't run into any nasty surprises. If you find yourself frequently in danger of being unable to pay your credit card bill, then curb your spending right away.
8. Over-limit fees
Thanks to the Credit CARD Act of 2009, over-limit fees aren't a concern for many people anymore. Prior to this, card issuers would automatically process your transactions even if they were over your credit limit and then charge you additional fees for being over the limit. This led to a vicious cycle of escalating balances and interest charges that many cardholders could not escape.
Now the law requires cardholders to opt in if they want any over-limit transactions to be processed. Otherwise, your card will just get declined. If you do opt in, you can be charged over-limit fees, but the law restricts how much card issuers can charge. The maximum is $25 for a first incident and $35 for subsequent incidents. They're not allowed to charge you more than the amount by which you exceeded your limit, so if you're only over by $20, the most they can charge you is $20. You can only be charged this fee for two consecutive billing cycles if your account remains over its limit. But if it drops below the limit and then exceeds it again, the company can enforce additional penalties.
The easiest way to avoid these fees is to be mindful of your credit limit and stay well below it. Ideally, you don't want to be spending more than 30% of your credit allowance anyway, because it can hurt your credit score. But if you find yourself regularly bumping up against your credit limit, look for ways to cut spending or try applying for a credit limit increase.
Most credit card fees can be avoided by using your card responsibly. Always read through the cardholder agreement before you sign up for a new credit card to ensure that you understand how much you could be charged for things like carrying a balance or paying late. By being mindful of these things, you can save yourself a lot of money in the long run.