How Much Does a Credit Card Cost? Credit Card Fees Explained

You’re looking through your credit card statement when all of a sudden you see it: a fee you didn’t know was coming.

Don’t fret; it’s happened to all of us. After all, fees and interest are the main way credit card companies make their money.

But here’s what every smart credit card user knows: Credit cards don’t have to cost anything. If you understand credit card fees — and how to avoid them — you won’t pay an extra cent for the rewards and convenience of plastic.

You can usually see all of a card’s fees in what’s known as the Schumer Box, an easy-to-read summary of card terms.

Here’s a breakdown of eight common credit card fees and how to never pay them again.

Interest Fees (Finance Charges)

• Interest charges arise when you carry a balance on your credit card from one month to the next without paying the full statement balance.
• You’ll incur interest when you don’t pay your statement balance in full by the due date. (Yes, this means you’ll owe interest even if you diligently make your minimum payment.)
• Your interest fees are based on the APR of your card (we explain APRs more below).
• To mitigate risk against customers who default, banks generally give higher interest rates (APRs) to riskier borrowers.
• Most credit card issuers make most of their money from interest charges, since many users don’t pay in full each month.
• Interest can add up quickly — and bury you in credit card debt.

How to Avoid Interest Fees

Pay your entire statement balance by the due date of each billing cycle. To learn more about when credit card issuers start charging interest fees, read: How Paying a Credit Card Works.

Annual Fees

• You’ll pay this fee for the privilege and perks of using certain credit cards.
• Many credit cards don’t charge an annual fee. For cards that do, it can range from $30 (for a basic card) to $600+ (for a rewards card with top-notch perks).
• Rewards cards with premium benefits, like airport lounge access or ample travel rewards, often have the highest annual fees.
• Even with a hefty annual fee, however, a card can be a good value and actually save you money in the end. You just need to calculate whether the benefits and rewards outweigh the cost of the card.

How to Avoid Annual Fees

Select one of the many credit cards without an annual fee. Or, if you’re coming up on your annual fee, call your credit card issuer and ask to have it waived. The issuer may give you a retention offer for an equally valuable statement credit to keep you as a customer or bonus rewards for spending a specific amount.

Certain rewards credit cards also waive annual fees for the first year, and several major issuers waive annual fees for all active duty military personnel.

Balance Transfer Fees

• A balance transfer is when you pay one credit card with another credit card, or transfer debt from one card to another.
• Issuers charge a fee for this credit card transaction, usually a flat fee or a percentage of the balance transferred. For example, your card may say it’s “$5 or 3% of the amount of each transfer, whichever is greater.”
• Some balance transfer cards will waive this fee if you transfer your balance within a certain period after the account opening.
• Balance transfer fees are separate from the finance charges you’ll incur if a transferred balance accrues interest.

How to Avoid Balance Transfer Fees

The simplest way? Never transfer a balance to another credit card. If you want to transfer a balance, you might be able to find a card with no balance transfer fee, or a card that waives the fee under certain conditions.

You should compare the cost of any balance transfer to the amount of interest you would end up paying if you left that balance where it is. If you’re paying a high interest rate, it could save you money to transfer that balance to a 0% balance transfer APR card, even though you’ll pay a fee to move the debt.

Cash Advance Fees

• You’ll incur cash advance fees when you borrow cash from a credit card, either by using it at an ATM or filling out one of the “convenience” checks your issuer mails you.
• A cash advance fee is usually the greater of a flat fee or percentage that you borrow. For example, your card could say “$10 or 5% of the amount of each transaction, whichever is greater.”
• We don’t recommend cash advances because they’re expensive and can indicate fiscal irresponsibility to your bank.

How to Avoid Cash Advance Fees

Don’t borrow cash with a credit card. It’s never a good idea.

Interest will start accruing on cash advances as soon as you take them out, adding even more to the total cost. They seem convenient, but cash advances should only be used as last-ditch solutions for emergencies.

Foreign Transaction Fees

• Some cards add a fee when you make a purchase in a foreign country or in a currency other than U.S. dollars. This is also known as a foreign currency exchange fee.
• Most credit card issuers charge around 3% of the purchase price.
• To appeal to their globetrotting clientele, many travel rewards cards don’t charge this fee.

How to Avoid Foreign Transaction Fees

Choose a card with no foreign transaction fees. Even if you don’t use it for everyday purchases, break it out when making purchases abroad or in a foreign currency.

There are also quite a few business cards with no foreign transaction fees. Using one could make a noticeable difference in your bottom line.

Late Payment Fees

• Most banks charge a late payment fee when you don’t make the minimum payment by your statement’s due date.
• Some banks are willing to waive the first late fee, or don’t charge late fees at all.
• Luckily, a late payment fee doesn’t necessarily mean a late payment will show up on your credit reports.
• If you continue to pay late, your credit card issuer may charge an additional late fee on every billing cycle when a payment is past due.

The federal Credit CARD Act of 2009 put certain caps on the fees card issuers can charge for late payments. The CFPB, however, recently reviewed credit card late fees and increased the previous CARD Act limitations to the following::

• Up to $28 for an initial late payment
• Up to $39 for additional late payments within six months

It’s also worth noting that your late fee can never be higher than the size of your minimum payment.

Card issuers can charge up to the amounts above, but that doesn’t mean they will always do so. In some cases they may base the fee partly on your unpaid balance.

Your state may also have specific legislation regarding late fees, although this doesn’t seem to be very common. California law, for example, generally limits late fees according to how late the payment is: $7 for five days late, $10 for ten days late, and $15 for 15 days late. But there are some exceptions to those limits.

How to Avoid Late Payment Fees

Always pay at least the minimum by your statement’s due date. If you accidentally pay late, call your credit card issuer and explain your mistake. You can ask the rep to waive the fee. If you don’t normally make late payments, the issuer may credit the fee back to your account.

To avoid paying late in the future, set up autopay and create calendar reminders to confirm those automatic payments were successful.

There’s another potential downside to late payments. If you make your payment 60 days or more after the due date,the card issuer may also apply a very high penalty APR to your account, depending on your card terms. This is just another reason to make sure your payments are timely.

Over-the-Limit Fees

• Your card issuer may charge this fee if you make a purchase that results in a balance (debt) greater than your credit limit.
• Legally, the fee can’t be greater than the amount by which you went over.
• Unlike many fees, you must opt in to over-the-limit fees by telling your credit card issuer you want the ability to exceed your credit limit. If you don’t opt in, your issuer will simply deny any transactions that put you over the limit.
• Maxing out your credit cards or surpassing your credit limit will lead to a high revolving credit utilization ratio — and can seriously hurt your credit scores.

How to Avoid Over-the-Limit Fees

Don’t opt in to this fee. If, for some reason, you decide to opt in, don’t exceed your credit limit. This is good advice in any situation.

Returned Payment Fees

• Most credit card issuers charge this fee when the bank returns your payment.
• Returned payment fees are often phrased as “up to $35” or so.
• Let’s say you make a $1,000 credit card payment from your checking account, which only has $800 in it. Your bank will reject the payment, and your credit card issuer will charge a returned payment fee.

How to Avoid Returned Payment Fees

Before paying your credit card bill, make sure you have enough money in your bank account, so you’re not slapped with fees for insufficient funds. Don’t forget to account for upcoming bills — like your rent or utilities — which may be auto-debited. Finally, make sure to accurately enter your desired payment information, including both your card information and billing address.

In addition to incurring fees, returned payments may also result in the card issuer applying a high penalty APR to your account.

What Does APR Mean?

As promised above, we’re also going to break down the definition of annual percentage rate (APR), which is the most common fee charged by credit card issuers.

You can think of APR like the interest rate your credit card issuer charges (stated as a yearly rate). The CFPB describes a credit card’s APR as the price you pay for borrowing money.

With most cards, you can avoid interest on purchases completely by paying your full statement balance by the due date every month. In other words, the APR on new purchases only matters if you’re carrying a balance from month to month, which we don’t recommend.

As a credit card user, here are the various APRs you could encounter.

Purchase APR

• You’ll pay this rate on regular purchases, like when you buy groceries with your credit card.
• Most credit cards offer a “grace period” on new purchases. During this time your balance won’t accrue interest, as long as you pay your statement in full each billing cycle.
• When you carry a balance over from the last billing cycle, that grace period may no longer apply. New purchases could immediately start accruing interest at the purchase APR.
• Some cards have a 0% introductory APR on purchases, which means you won’t pay interest for a certain period of a time (usually a year or more).
• Purchase APRs depend on creditworthiness and are usually between 8% and 25%.

Balance Transfer APR

• You’ll pay this rate on any balances (credit card debt) you transfer from another credit card.
• Usually, there’s no grace period and interest starts accruing immediately after a balance transfer. You’ll probably also be on the hook for a balance transfer fee.
• Balance transfer APRs depend on creditworthiness too. These APRs are usually between 8% and 25%.
• Some cards have a 0% introductory APR on balance transfers.

Cash Advance APR

• You’ll pay this rate on cash advances.
• Usually, there’s no grace period and interest starts accruing immediately. You’ll probably also be on the hook for a cash advance fee.
• It’s very rare to find a card with a 0% introductory offer on cash advances and APRs around 25% are common.
• Cash advances are seen as quite risky by card issuers, so they make you pay heavily for them.

Penalty APR

• When you do something irresponsible, like miss a payment by more than 60 days or make a returned payment, the credit card issuer may be allowed to change your purchase APR to a penalty APR.
• You might be able to get rid of the penalty APR by using your cards responsibly, paying all your bills on time, and then asking your issuer for a lower rate.
• After six months of on-time payments, the CARD Act requires card issuers to lower your penalty APR back to your regular interest rate.
• While not all credit cards have penalty APRs, any credit card issuer can change your APR once the account has been open for at least 12 months. The card issuer may need to give you advance notice of a rate increase first, depending on the card type and terms. This is your chance to close the account instead of accepting the change.

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