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Credit Card Fees
 Mar 11, 2009

Are you aware of what credit card fees you are paying, or what defines the fees? In this article we will review the following credit card fees - interest charges (finance charges), annual fees, late fees, over the limit fees, balance transfer fees, and cash advance fees.

When you use credit cards, you are likely to find yourself paying a number of fees. This is because a credit card is actually a loan. Many people overlook this fact because it seems as though a credit card represents “available funds.” In reality, though, a credit card represents someone else’s money, and you have to pay in order to use it. There are a number of common fees that you will pay when you use a credit card:

  • Interest charges. These are not presented as fees, but rather as a “finances charge”. However, the bottom line is that interest has to be paid when you carry a credit card balance. Interest fees are paid on money that you carry on your card from month to month. You have to pay a finance charge for the privilege of continuing to keep the credit card issuer’s money outstanding. Interest is figured as an annual rate. At its most basic computation, the annual rate is divided by 12 and monthly interest is figured. If you have $1,000 on a credit card, at 15% interest, you divide that 15 by 12 to get 1.25. You then multiply .0125 by $1,000 to see that you are paying $12.50 in interest each month. Of course, things change if your interest is compounded daily.
  • Annual fees. This is a fee that isn’t terribly common any more. This is a fee that you pay every year in order to keep your credit card account active. Even companies that still charge an annual fee often waive it if you spend a certain amount of money using the credit card each year. Most annual fees are between $30 and $75, depending on the card issuer and the benefits you get from being a card holder.
  • Late fees. Late fees are among the most costly fees that credit card companies charge. If your payment arrives after the due date – even a day or two after – you can be charged a late fee. Most credit card companies charge $39 for a late payment, but the fees range between $25 and $45. Realize that credit card companies do not look at the post date on your payment. You are charged late fees according to when the payment actually arrived at the facility. It is a good idea to mail your payment at least 7 to 10 days in advance to give it time to arrive. Realize that late fees will be added to your balance and you will be charge interest on them.
  • Over the limit fees. Over the limit fees are another type of insidious credit card fee. When you exceed your balance, many credit card companies won’t immediately cut you off. Instead, you will be charged a fee for going over your credit limit. Like the late fee, this is often $39, and is added to your balance. It is worth noting that if you are close to your credit limit, a late payment fee can put you over the edge and result in an additional fee. Credit card companies make millions each year thanks to these types of compounding fees.
  • Balance transfer fees. When you transfer a balance from another credit card or from some other consumer loan, you often have to pay a transfer fee. This fee is usually equal to 3% of the amount transferred, although it can range from 1% to 5%. Many credit card companies have a minimum balance transfer fee of between $15 and $25, just in case the 3% doesn’t amount to much. If you are opening a new account, some credit cards will give you a balance transfer without charging you a fee.
  • Cash advance fees. While most credit cards only charge a higher interest rate when you make a cash advance, there are some companies that actually charge you a cash advance fee (usually amounting to about 3% to 5% of the advance) on top of the higher interest rate. Like the other fees, cash advance fees are capitalized – added to the principal of your credit card balance and subject to interest charges.

The best way to avoid fees when using credit cards is to avoid carrying a balance from month to month, and to make your payments on time. If you are careful in your credit card use, you can get the benefits of having a credit card without having to pay fees. However, if you are not careful, you will find that the fees continue to add up – and that you increase your debt rapidly.

Related Article: Credit Cards - fine print >>

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