8 Common Credit Card Fees and How To Avoid Them

Borrowed money comes at a cost, and credit cards are no different. What sets them apart is the way they charge interest and the myriad (and sometimes hidden) fees they charge that can quickly increase your balance due. 

When you know how much using your credit card will truly cost, you can make better decisions about when and how to use them. 

Once you see how the interest and fees work, you can figure out how to minimize those costs, maybe even get them down to zero (yes, it’s possible to use credit cards for free). You can control how much your credit cards cost you.

In the following section, we break down the most common credit card fees and how to avoid them, possibly saving you hundreds of dollars.

Common Credit Card Fees

1. Annual fee

Some credit cards come with annual fees, ranging from about $30 to more than $500. These are automatically charged to your card once a year, and they’ve usually connected with charge cards and rewards cards. 

If those rewards exceed the annual fee, even a high fee may be worthwhile. Some cards will waive the fee for the first year, giving you that much time to use the card for free (and then you can cancel it).

How to avoid annual fees: To avoid paying a fee for having a credit card, consider a card with no annual fee. Our top choice for consumers looking for cashback is the Citi® Double Cash Card. You may also consider Capital One QuicksilverOne Cash Rewards Credit Card if you have fair or average credit. As for annual-fee cards, ask for a retention offer or opt for a lower or no annual fee alternative.

2. Interest charges

Credit card interest doesn’t work the way most people expect it to. If you have a credit card with a 16 percent APR (annual percentage rate), you probably think you’ll be charged 16 percent interest each year. That assumption makes sense, but it’s wrong. 

Credit card companies use that APR to come up with a daily percentage rate (you can figure it out by dividing your APR by 365). They apply that daily percentage rate to your average daily balance, another thing that credit cards do differently than other loans. 

The average daily balance is what it sounds like. The credit card company figures out your balance every day, starting with the prior month’s balance due and adding activity day by day for the full billing period. Purchases increase the daily balance, and payments lower it. At the end of the billing period, they add up all of the daily balances and divide the sum by the number of days in the billing period. 

That little equation gives them your average daily balance. The final step in calculating your monthly interest charge involves multiplying your average daily balance by the daily percentage rate and then multiplying that result by the number of days in the billing period.

When you run a balance on your credit cards, you’re paying interest on the interest they charge you; that’s called compound interest

Depending on how frequently the credit card company compounds interest (which should be spelled out in your cardholder agreement), you could even be paying interest on interest that was charged only days ago. 

That can bump up your total interest charges even higher than your APR. The only way to avoid it is to pay off your full balance every month.

How to avoid interest charges: You can avoid interest by paying your bill in full every month. Reduce your spending or consider a 0% APR card that won’t charge interest for up to 21 months if you can’t pay your bill in full.

If you have fair or average credit, consider the Capital One QuicksilverOne Cash Rewards Credit Card, while if you have excellent or good credit, consider the U.S. Bank Visa® Platinum Card.

A 0% APR card provides a temporary reprieve from interest. In order to avoid interest altogether, you must still make minimum payments and pay your balance in full before the intro period ends.

3. Late payment fee

The credit card company can charge you $28 the first time you miss a payment due date, and $39 any time after that. On top of that, making a late payment can set you up for a penalty interest as well, and those average around 30 percent.

How to avoid late payment fees: You can open a credit card without late fees if you don’t have a credit history, such as the Petal® 2 “Cash Back, No Fees” Visa® Credit Card or the Citi Simplicity® Card for people with excellent credit histories.

However, you should always make your minimum payment by your due date. You can then build a positive payment history, which is one of the most important factors in your credit score. Make sure you’re never late by setting up autopay for your minimum due.

4. Balance transfer fee

You’ll typically incur a fee of 3% to 5% if you transfer debt from one credit card to another, with a minimum of $5 or $10.

How to avoid balance transfer fees: If you can save money during the interest-free period, then balance transfer fees can often be justified. However, you can search for cards without balance transfer fees. You usually need excellent credit to qualify for these cards.

5. Foreign transaction fee

You may be charged foreign transaction fees if you use your credit card outside the US or if you buy something using foreign currency (like ordering something from a Canadian website and paying in Canadian dollars, even if you’re sitting in Baltimore when you do it). These fees cover the cost of currency conversion rates and usually run between 1 and 3 percent.

How to avoid foreign transaction fees: If you have average credit, consider credit cards that do not charge foreign transaction fees, such as the Capital One Platinum Credit Card.

6. Over-the-limit fee

Your credit card company may charge you a fee for exceeding your credit limit, but the fee cannot be higher than the amount you overspend. CARD Act of 2009 mandates that you have to opt in to approve this fee, so it is a bit different than others. If you go over your credit limit, your creditor denies the transaction, but you can opt to get these transactions approved for a fee of up to $35. By not opting in, you will simply have any overlimit purchases declined by your card issuer.

How to avoid over-the-limit fees: Over-the-limit fees provide little benefit, so you shouldn’t opt in. The amount of credit you use should not exceed 10% of your credit limit. Using alerts, you can also monitor how much you can charge on your card as you approach your credit limit.

7. Cash advance fee

Cash advances may seem like a fast way to get cash, but they have high fees attached. The fee for a cash advance is typically between 3% and 5%, which can add up quickly if you withdraw hundreds of dollars.

How to avoid cash advance fees: You may be better off borrowing money from friends or family or taking out a personal loan (which usually has better terms).

8. Returned payment fee

Having insufficient funds in your bank account could cause your payment to be returned if you schedule a credit card payment. You may be charged a returned payment fee, usually up to $40, by your card issuer.

A $40 fee could be added to your bill if you schedule a $750 bill payment with only $500 in your checking account.

How to avoid returned payment fees: If you plan to schedule a payment, be sure that your bank account has enough funds.

Final Words

Some credit cards charge a lot of fees that seem insignificant, but can add up over time. Knowing the fees we’ve described above and how you can avoid them is important. To avoid costly fees, you should pay on time, make sure you have enough money in your bank account, and spend within your credit limit.

Leave a Comment