Credit cards can be valuable financial tools when used the right way. A credit card can work as an emergency loan when you’re in a pinch—like when your car breaks down and you need to get to work. Credit cards can make travel more affordable and more comfortable. Many include valuable consumer protections and perks that make our transactions safer and more convenient.
Of course, credit cards aren't necessarily free. Cardholders who carry balances month to month are charged interest for the privilege of borrowing money. And then there is a bevy of fees you may or may not be charged, depending on how you manage and use your card.
Finance Charges
Finance charges (also known as interest charges) aren’t tacked onto your account in a fixed amount like other fees. Instead, these charges vary based on your credit card’s annual percentage rate (APR)—and the amount of the balance you carry beyond your grace period.
Note
A grace period is the time you have, after your statement date, to pay your balance in full before interest is charged. Credit card issuers have to give you at least 21 days once they’ve mailed out your monthly bill.
Considering how high the average APR is today, finance charges should be taken very seriously. They can become exorbitant when you have debt. Luckily, there’s one surefire way to avoid them altogether, and that’s by paying your balance in full every month.
Annual Fees
The annual fee is a fee some card issuers charge simply for the privilege of carrying the credit card. Paying an annual fee may seem strange since there are many cards that don’t charge one, but credit cards with fees tend to offer more benefits and perks.
For example, you can pay anywhere from $95 to $550 per year for one of the top travel credit cards, but they often come with benefits like free checked bags, priority boarding, airport lounge access, or credits toward incidental airline fees—and those are just some of the perks available.
Annual fees are easy to avoid since there are many credit cards—even rewards credit cards—that don’t charge this fee.
Foreign Transaction Fees
Foreign transaction fees are charged by some credit cards when you make a purchase outside the U.S. (or purchase something online in another currency.) You may never encounter this fee, but foreign transaction fees—which are typically 2%-3% of the purchase amount—can add up if you travel often.
The way to avoid them? Easy. Use a credit card that doesn’t charge one.
Cash Advance Fees
Some credit cards allow customers to take out a “cash advance.” In essence,they borrow a sum of cash that is then added to their credit card balance. Cash advances (which may be retrieved at an ATM or bank teller or deposited in your bank account) usually come with a separate, higher APR than the standard rate for purchases. Worse, you’ll be charged interest from the day of the advance because cash advances don’t usually have a grace period.
There is also usually a cash advance fee. These vary by card, but they are typically 3%-5% of the cash advance amount, with a $5-$10 minimum.
How can you avoid this fee? Keep money in savings you can access in an emergency, and never use your credit card for a cash advance.
Late Payment Fees
In most cases, you will be charged a late payment fee any time you make a payment after your credit card’s due date (or if your payment is less than the minimum due). While there are maximums enforced by law, these fees vary by credit card. Most issuers determine the fee based on how often you've let your account become past due. But some credit cards have tiered late fees based on your credit card balance.
Note
Penalty fees, including for late payments, were capped by the 2009 Credit Card Accountability, Responsibility, and Disclosure Act (the CARD Act) and can only be increased if inflation merits. There are two caps: one for accounts with the first late payment in the past six months, and another for accounts with at least one other late payment in the prior six months. For 2020, those caps are $29 and $40, respectively.
Make sure to avoid this fee by paying your credit card bill early or on time each month. If you don’t, and your credit card payment is more than 60 days late, your card issuer can enact a penalty APR that is likely much higher than your credit card’s ongoing APR. At that point, you’ll have late fees and mounting interest charges to handle, so it’s best to avoid late payments altogether.
Returned Payment Fees
You might be charged this fee if the payment you make on your credit card isn’t valid for any reason. Let’s say you mail in a check for your payment without realizing your funds are insufficient to cover it. Or, you accidentally make a payment out of a checking account you just closed instead of your new one.
This fee is subject to the same CARD Act rules as late payment fees, and based on the 2020 caps, it can be no more than $29 if there have been no returned payments in the previous six months and no more than $40 if there have been.
Over-the-Limit (or "Overlimit") Fees
When you get approved for a credit card, you’re typically assigned a credit limit that defines the maximum balance you can have at any given time. If you make purchases that cause your credit card balance to exceed that limit, then you may be hit with an over-the-limit fee.
Fortunately, the CARD Act of 2009 reigned in abusive over-the-limit fees, too. The legislation did so by mandating that credit card issuers can only charge these fees if cardholders “opt in” or agree to them ahead of time. As a result, many credit card issuers have stopped charging over-the-limit fees.
If they do charge, the fees are capped at $29 and $40, just as with the late and returned payment fees. You can avoid this fee by refusing to opt in, but be prepared for the possibility that your transaction will be declined. And of course, you can avoid the entire situation by monitoring your credit card balance.
Balance Transfer Fees
Many credit cards allow cardholders to transfer a balance from another credit card account. Some credit cards even cut borrowers a little break on finance charges for transferred balances, granting them a low or 0% APR for a limited time. This can help you save money if you’re consolidating high-interest debt into a single account with low or no interest.
That said, most cards that allow balance transfers charge a fee for them, usually 3% or 5% of each transferred balance, with a $5-$10 minimum. For example, if you were to consolidate $10,000 of debt, a 3% balance transfer fee would be $300. That may seem high, but the interest savings you can gain with these offers can more than make up for this fee, depending on how long you take to pay it off and how high the APR on your old card was. Here’s some advice on how to do the math.
