Making monthly regular payments on your credit card is a great way to build up your credit history, especially if you are aiming to improve your credit score. However, there are a ton of charges, fees, and penalties you can rack up with your credit card—sometimes just by accident.
Every time you make a purchase with your credit card, the amount you are charged on the card is added to your total balance. However, it is important to note that your credit card balance is not just the sum of your purchases; it also includes the interest on your balance, plus the many fees and penalties that card issuers typically charge.
From balance transfer to annual fees and even cash advances, here is a list of the fees you may incur while you are using your credit card and how to minimize them or avoid them.
1. Interest Fees
An interest fee, also known as a finance charge, is charged on your card when you don’t pay the full statement balance from one month to the next or on each billing cycle. What’s more, you will still owe interest, even if you make minimum payments diligently without completing your balance.
Interest fees on your credit card can add up pretty fast, burying you in debt.
So how does your credit card interest work? Well, card issuers charge an interest on your card based on the annual percentage rate (APR).
What Does APR Mean?
APR is a cumulative yearly percentage interest applied to your card. For example, if your card issuer charges a 20% APR, you will be charged about 1.66% interest on your monthly outstanding balance.
How to Avoid It
To avoid an interest fee, be sure to pay more than the minimum of your remaining balance to cover your entire balance in full. The next best option is to reduce your spending, especially if you can’t afford to pay your bills in full. You also have the option of going for a 0% APR card that will charge 0% interest for up to 21 months.
2. What Is an Annual Fee?
An annual fee on your credit card is the cost of simply using your card and keeping its account open. Annual fees are a common credit card fee charged by credit card providers, and they are charged automatically on your card on an annual basis.
Typically, this fee ranges from $30 for a card with basic benefits to $600 or more for a card with top-notch perks. While not all cards come with an annual fee attached, cards that do feature more benefits. However, you have to make sure that the benefit that comes with a card that charges you an annual fee exceeds the cost of the fee. Anything less will lose you money.
How to Avoid It
Avoiding an annual fee is as simple as selecting a card that doesn’t have one. If you are already using a card with an annual fee, you can contact your credit card issuer to downgrade your account without damaging your credit score.
This can be a great option if you are not using the rewards associated with the card in the first place. You also have the option of redeeming your accumulated rewards right before switching to a no-fee credit card.
3. Balance Transfer Fees
Credit card issuers will charge a balance transfer fee when you transfer an outstanding balance from one card to another or use a credit card from one institution to pay the balance of another card from a different institution.
If you are moving your balance to a new card, the new card issuers will charge interest from the day the amount is transferred to the new card. In some cases, card issuers will waive this fee if you transfer the balance within a set period after opening your new account.
How to Avoid Them
While you can easily avoid this fee by never moving your balance from one card to another, an alternative solution to go for when you need to transfer debt between cards is to find a card that offers a waiver under specified conditions. It’s also good to compare the cost of leaving your balance on the old card versus paying the one-time fee to move your debt to the new card.
4. Cash Advance Fees
A cash advance fee is incurred on credit cards that allow you to take out cash advances.
While such credit cards may seem like an easy path to quick cash, they can be costly, as some card issuers charge between 3% and 5% for every cash advance.
How to Avoid Them
The best way to avoid a cash advance fee is to simply borrow money from friends or family in the form of a
5. Foreign Transaction Fees
A foreign transaction fee (also known as a foreign exchange fee) is incurred whenever you make purchases outside the U.S.
On most credit cards, the charge will be about 3% of the purchase price.
How to Avoid Them
If you are an avid traveler, you can go with a card issuer that doesn’t charge a foreign transaction fee. To appeal to a globetrotting clientele, some institutions will waive it. You can also use a business card with no foreign transaction fees.
6. Late payment fees
If you are unable to make the minimum payment on the due date of your credit card statement, you will incur a late payment fee. The good news is that some banks will waive this fee the first time you run late, and the late payment won’t be reflected on your credit report.
Typically, an initial late payment will attract a fee of up to $28. Additional late payment fees can be as high as $39.
The risk of incurring late payment fees is that your card issuer can apply a higher APR penalty to your account if you make a payment 60 days after the due date.
How to Avoid Them
Choose a credit card that has no late fee. You can also pay the minimum before your statement’s due date or call your credit card issuer to explain your situation if you are unable to make the payment. In some instances, your card issuer can waive the fee if you have a record of making early payments.
7. Returned Payment Fees
If your credit card payment bounces due to insufficient funds or other reasons, most credit card issuers will charge a returned payment fee.
How to Avoid Them
Make sure you have sufficient funds in your account before making a credit card payment. If you don’t have sufficient funds, check your account to cancel any scheduled payments on your credit card.
8. Over-the-Limit Fees
This fee is charged when you exceed your credit limit. It’s a bit different from the rest, as it requires you to opt in to approve it. The risk of approving this fee by spending above your credit limit is that it leads to high revolving credit utilization.
This can damage your credit score.
How to Avoid Them
Simply don’t opt in for an over-the-limit fee. However, in a situation where you need to, it is good practice to keep the amount of credit you spend below 10% so that you don’t exceed your credit limit.
Conclusion
Overextending your credit card spending can easily lead you into a bottomless pit of credit card debt. Add that to the charges that might seem negligible in the short term, and you can turn what was supposed to be a great asset into a ball and chain on your finances.
Now that you have familiarized yourself with the fees you may incur on your credit card, you can take action accordingly and avoid them for a prosperous financial future.
