Credit Card Fees: Most Common Types, How to Avoid Them & More
Credit card fees can be expensive and annoying, there’s no doubt about it. But many of them can be avoided if you’re careful and others may be worth paying if you get something worthwhile. For example, many of the best rewards credit cards charge annual fees, but people who use them frequently are able to earn additional rewards that outweigh the extra cost.
Given the myriad different fees that credit cards are known to charge, the differing situations in which they apply, how quickly they can add up, and the corresponding implications for your account/credit standing, it’s definitely worth familiarizing yourself with the ins and outs of these pesky charges. The following topics are explained in detail below.
Every credit card offer has a basic fee structure which includes charges that apply to all account holders, irrespective of their particular usage habits. During the first year that an account is open, these basic account fees (i.e. non-penalty, non-usage fees) cannot exceed 25% of an account’s credit line. Basic account fees may include:
Application/Processing Fee: An administrative charge that is used to cover the cost of evaluating your application for approval. This fee is becoming increasingly rare, especially among offers targeted to people with good credit, due to market competition. However, certain issuers that target people with damaged credit are using this type of fee -- which is assessed prior to account opening -- as a way to skirt CARD Act regulations capping first-year fees and profit off of the competition vacuum in the bad credit space.
Account Set-Up / Program Fee: Just another excuse for the credit card company to charge you a fee, this non-descript one-time charge is typically assessed when you are approved for a credit card, ostensibly to pay for the general benefits of being a cardholder.
Annual & Monthly Fees: These recurring “membership” fees are used to cover the cost of account maintenance, such as customer service, rewards programs, etc.
Credit card fees aren’t always fixed. In other words, they are often a product of the types of transactions that we use our cards to make.
Purchase Fee: A fee that accompanies each purchase that you make in order to cover the credit card company’s payment processing costs, a purchase fee is more common to debit cards and prepaid cards than credit cards.
Foreign Transaction Fee: A 2-4% surcharge that often applies to credit card transactions processed by merchants outside of the United States, foreign transaction fees can apply not only when you are physically abroad, but also if the company you’re buying from is based internationally. You can read more such costs in our Foreign Transaction Fee Guide as well as browse through credit card offers that don’t charge any foreign fees.
Balance Transfer Fee: When you transfer debt from one credit card to another, presumably to get a lower interest rate, the new credit card will usually charge you a fee. This fee, typically 3% of the balance being transferred, is used to obscure the cost of the transaction, enabling the issuer to offer an eye-catching 0% term while still bringing in revenue. Anyone contemplating a balance transfer should therefore consider not only a given card’s introductory interest rate and the length of time it will remain in effect, but also the fees that it charges and its regular APR.
Cash Advance Fee: When you use your credit card at an ATM in order to tap into your credit line and receive cash, not only will your credit card company immediately begin to assess interest (usually at a rate of 20% or higher), but it will also charge a significant up-front fee. According to WalletHub data, the average cash advance fee is either 4% of the amount withdrawn or $10, whatever is greater. Cash advance fees are therefore one of many reasons not to use your credit card like a debit card.
Merchant Surcharge: Though more a cost of doing business with a credit card than a straightforward credit card fee, a merchant surcharge represents a retailer’s ability to increase the cost of an item when you use plastic, relative to cash.
Dynamic Currency Conversion: Foreign merchants are also known for overcharging tourists by applying unfavorable exchange rates when converting purchase totals to dollars, in a process known as Dynamic Currency Conversion, or DCC. Fortunately, dynamic currency conversion is easy to avoid. Simply always insist on paying in the local currency, and if you are uncomfortable doing mental price conversions to dollars, bring a cell phone or pocket calculator along on your trip.
Credit Limit Increase Fee: In rare occasions, a credit card company will charge certain customer segments a fee in return for a higher credit limit. This fee can be significant, often as much as 25% of the limit increase.
Credit Card Insurance Fee: Consumers who are concerned about their ability to afford credit card payments may sign-up for credit card payment insurance, which will cover minimum payments until the cardholder regains the means to pay. One must pay a monthly fee equal to a certain percentage of their balance in order to avail himself of this type of service. Given these potentially expensive fixed costs and the coverage loopholes that often exist, it’s best for consumers to set up an emergency fund rather than spend additional money on payment protection that might never even prove necessary.
When you make a mistake, there are repercussions. That is the rationale behind credit card penalty fees, and understanding which errors carry the most significant penalties will help you keep costs low.
Late Payment Fee: The charge that is assessed when your monthly payment is received after the due date. A late fee cannot exceed your monthly minimum payment, and you can typically get this type of charge waived the first time you incur it.
Over-Limit Fee: Assessed when your balance exceeds your approved credit line. Over-limit fees were a major problem for consumers before the CARD Act began requiring cardholders to opt-in for the ability to exceed their spending limits and capped the resulting penalty fees at the amount by which the limit is exceeded.
Returned Payment Fee: If you don’t have enough money in the bank to cover a check sent to your credit card company, you may be assessed a fee for the inconvenience.
As consumers, we all like having somewhere to turn for answers to our questions, particularly when they have financial implications. Providing those answers costs money, though, especially when you have actual human beings answering the phones. Credit card companies cover these costs with a variety of fees, which are often tied to the particular customer support services that you leverage as well as how often you do so.
Internet Access Fee: Usually this is a one-time fee assessed when you sign up to access your credit card account over the Internet. These fees are becoming increasingly rare given the popularity of online banking, and it won’t be long before they go extinct altogether.
Customer Service Fee: While most credit cards factor the cost of customer service staff into their other fees, some tack on an additional fee tied to each phone call you make. Most of the time, these fees are assessed for the privilege of talking to a live person, but some issuers will even charge you for automated calls. Customer service fees are far more prevalent on prepaid cards than credit cards.
Paper Statement Fee: In an effort to promote “green” banking and save on postage, some credit card companies may charge extra for the ability to receive paper account statements through traditional mail, as opposed to electronic statements via e-mail. Certain issuers may also charge a fee for requesting a copy of a previous month’s statement, so be on the lookout for that as well.
Expedited Payment Fee: While the CARD Act prohibits most fees associated with the payment of debt, the rule does not apply to expedited payments that require the assistance of a customer service representative. This type of fee has become nearly extinct since the passage of the CARD Act.
Replacement Card Fee: Most issuers will give you at least one replacement card for free, but subsequent replacements may cost you, especially if you require expedited processing and mailing.
While business credit cards can have all the same fees as consumer cards, many of the restrictions that apply to the amount and frequency of consumer credit card fees do not apply to small business credit cards, which were excluded from CARD Act protection.
Owners may also encounter additional credit card-related costs as a result of receiving credit card payments from consumers or corporate clients, including:
Credit Card Processing Fees: Businesses that accept credit card payments must hire a payment processing service and pay a small percentage (usually around 1%) of all purchases in fees.
Credit Card Fraud Insurance: Retailers and wholesalers must also worry about credit card fraud, as merchants, payment processors, and financial institutions are responsible for the cost of unauthorized transactions (which takes the burden off consumer victims). The added risk oftentimes necessitates paying for added payment processing security or taking out a fraud insurance policy.
With the exception of pre-account-opening processing fees, whose payment is a condition of card activation, credit card fees are typically rolled into your overall balance. That means they can begin accruing interest if you don’t pay your bill in full (including any other purchases you’ve made or debt you’ve incurred) by the due date.
Take annual fees, for example. When you decide to open a new credit card account, the annual fee is assessed like a standard purchase. In other words, your credit line will be reduced by the amount of the fee and will become part of your balance, which you must pay off in full by the due date in order to avoid incurring interest. If you can’t afford to pay the total amount, pay the minimum required (typically 3% or $15, whichever is higher) so as not to be charged late fees, though the remaining balance will accumulate interest.
Now if you choose not to activate the card, you can call the issuer and tell them that you have not activated the credit card and wish to close the account. They may still try to make you pay the annual fee, but make it clear to them that you are not liable for any fees because you are closing your account before actually activating the card.
No one wants to pay credit card fees. That’s why consumers frequently point to them as being one of the main deciding factors in their choice of a financial institution. Fortunately, credit card fees are fairly transparent these days, which means you should have some foresight into what you stand to be charged and when. This in turn gives you the ability to avoid fees by either finding a different product or changing your usage habits.
“Fees are something that the consumer can, in principle, easily quantify and translate into dollars saved,” says Maria-Ana Vitorino, assistant professor of marketing with the University of Minnesota’s Carlson School of Management. Customer service or branch availability is something that is harder for the consumer to attach a monetary value to, for example.”
You just need to know what to look for as well as a few tricks of the trade because, as Vitorino notes, “the more consumers get confused about fees, the less they are able to differentiate among products.”
- Set Up Automatic Payments: You can establish automatic monthly payments from a checking account for the minimum due, your full balance, or a custom amount.
- DO NOT Opt-in to Go Over Limit: As long as you make sure to keep credit utilization at reasonable levels (which is also beneficial to your credit standing), you won’t have to worry about an inability to make emergency purchases due to insufficient available credit. In other words, opting-in to exceed your credit limit is an avoidable recipe for trouble.
- Comparison Shop: Comparing credit cards across issuers always enables you to find the best deal. The fees that a given card charges should be one of the primary factors that you consider when comparing offers, especially if you have below-average credit since lucrative rewards and low rates likely won’t be available anyway.
- Go Paperless: You can help both the environment and your wallet by taking your credit card management online.
- Ask for a Fee Waiver: If you’re usually a model customer, you can typically ask for and receive a fee waiver in the rate instances in which you make a mistake.
- Order Free Credit Reports: Checking your credit reports not only helps mitigate credit bureau mistakes and fraud, but also enables you to gauge your credit standing and therefore ensure that you’re not selling yourself short when comparing credit card offers.
- Understand Special Rules for Military Personnel: Certain laws dictate credit card billing practices for active-duty military personnel when deployed, often limiting what they can charge in fees and interest while you are indisposed.
It’s also important to note that fees alone don’t drive the cost of credit card use. Interest is the other main type of cost associated with credit cards, and one could even make the case for potential credit score damage being another cost of doing business with plastic. You should therefore check out WalletHub’s guides on How Credit Card Interest Works and How to Improve Your Credit Score Interest Rate in order to learn more about reducing your credit card costs.
Examples of Particularly Nasty Credit Card Fees
During the course of WalletHub’s continued analysis of more than 1,000 different credit card offers, a few cards in particularly have stood out due to particularly troublesome fees. We highlight their issues below, with commentary WalletHub CEO Odysseas Papadimitriou – a noted personal finance expert and former senior director in Capital One’s credit card division – to give you a sense of what types of card features to avoid.
25% Credit Limit Increase Fee: The First Premier Bank Credit Card charges customers who ask for and receive a credit line increase a fee equal to 25% of the amount by which their credit limit rose. For instance, a customer receiving a $200 credit limit increase will get charged a $50 fee. As if being assessed an unusual fee is not enough, First Premier’s fine print dictates that this fee will not be refunded unless the customer notifies the bank that they do not wish to keep the higher limit within 30 days of the date of the periodic statement on which it appears.
“I think the most concerning thing about this fee is that while First Premier only gives customers credit limit increases upon request and clearly discloses the fee before assessing it, according to CNN, the fine print of their card agreement gives them the right to both grant credit limit increases and charge the corresponding fee unsolicited,” WalletHub CEO Odysseas Papadimitriou said. “When you consider this together with the fact that customers have a limited window to request a reversal of their limit increase, First Premier could very well pull a fast one.”
$170 in First-Year Fees for $300 Credit Limit: The main card displayed on FirstPremier.com charges $170 in first-year fees (a $95 processing fee and a $75 annual fee), which is equivalent to 56.6% of its credit line. Now, you might be wondering how this is legal in the post-CARD Act environment, where first-year fees are limited to 25% of the card’s initial credit line. Well, the limit currently only applies to fees charged during the first year an account is open because the courts granted First Premier’s request for a preliminary injunction to the Federal Reserve’s October 2011 amendment to Regulation Z that would include fees charged before an account is open as well. Legal nitpicking aside, the reason why this First Premier fee is bad is that instead of paying a $170 non-refundable fee for the right to use a credit card, with $30 more, consumers can simply put their cash toward a secured credit card’s security deposit, which is completely refundable.
“I suppose we’ll just have to wait and see how things play out in the courts, but the issue is interesting in the sense that we as a nation criticized regulators for falling asleep at the switch and helping bring about the Great Recession, but now regulators are facing roadblocks in trying to eliminate clearly unfair, burdensome fees,” Papadimitriou said. “I think it’s time for credit card companies to really get on board with working together with regulators to do what’s right for their customers and the economy.”
$495 Annual Fee: Both the UBS Preferred Visa Signature Credit Card and the Visa Black Card from Barclays – an imposter attempting to capitalize on the American Express Centurion Card’s pop culture mystique – charge nearly $500 a year in membership fees. Though each of these offers comes with a range of benefits, they nevertheless represent poor value given the market competition and the fact that the sum of their parts likely come close to their significant fees.
“We all hear ‘black card’ thrown around a lot in popular culture, and the term has garnered a certain measure of social cache given its connection to the uber-wealthy and their lavish lifestyles. The thing is, the real black card doesn’t actually bear the black card name. The term actually describes the color of the American Express Centurion Card, which is an invite-only product that is rumored to have a $5,000 initiation fee as well as a $2,500 annual fee and is catered to people who spend millions of dollars on plastic each year. It’s difficult to understate the difference in terms of the costs and benefits associated with these two cards,” Papadimitriou said. “Barclays is simply trying to pull a fast one. But on the semi-bright side, one would think that consumers either can’t afford such a pricey piece of plastic or at least have to sense to look into such a costly purchase before ponying up.”
5% Cash Advance Fee: A number of cards from Commerce Bank as well as the Orvis Credit Card from First National Bank charge customers who want to transfer an unpaid balance from another credit card a fee equal to 5% of that balance. Given that the average consumer has more than $6,000 in credit card debt, paying such a steep transfer fee would be a very costly mistake, especially since there’s at least one free balance transfer card on the market and a wide variety of cards that charge 3% fees.
“Balance transfer credit cards are a gift and a curse. On the one hand, they offer real potential for significant savings. On the other hand, they can be used to perpetuate bad habits and rack up unsustainable debt,” Papadimitriou said. “The key is to find the best possible balance transfer credit card and to develop, with the aid of a credit card calculator, a debt repayment strategy that will enable you to pay off at least the vast majority of what you owe by the time the card’s low introductory interest rate expires.In order to find a card that will allow you to maximize your savings, you must consider not only the size of your balance as well as how much you can pay each month, but also the combined implications of each card’s introductory interest rate, intro term, balance transfer fee, annual fee, and regular interest rate. Again, a credit card calculator will help you take all of those factors into account, and I’d wager that the card you eventually pick will have a transfer fee that’s a lot lower than 5%.”
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