Credit card fees and charges explained:
Credit cards offer a secure, protected and convenient way to make payments, and also give a great degree of financial flexibility. The main benefit offered by a credit card depends what you using it for, whether it’s to fund a large purchase, enjoy rewards for certain kinds of transactions, or simply as an extra source of liquidity.
However, the main pitfalls of credit cards to be avoided are the fees and charges that can be levied. These range from the standard interest rate fee, to default charges for missed payments, to unexpected charges such as closure fees. Here we’ll outline the main fees to be aware of.
Some fees are often overlooked by customers when applying for a card. Fees like interest are usually what people are wary of when it comes to credit cards, with the assumption being that the less you spend on your card, the less likely you will be to face charges. But this is not the case, other fees apply regardless of how much you use your card, and may apply if you don’t use your card enough! For example, many cards charge a flat annual fee on top of any other costs.
This varies from provider to provider, and is particularly relevant to premium cards that offer perks. It’s worth having a look at what the perks versus the annual fees are, and whether it’s worthwhile for you. Also be aware that the first years annual fee might be waived by some providers, but you should still take into account that you’ll have to pay this going forward.
Inactivity fees are another thing to be careful of. Some cards levy fees if you haven’t used your card for a certain period (usually 12 months). An unused card might also be cancelled by the provider. This brings us to the next overlooked fee, that of an account closure. In some cases, the provider will charge a fee for terminating the card service, so be careful of this too.
The main fee to be aware of with credit cards is the interest rate. Most cards levy an interest rate of around 19% per year, known as the Annual Percentage Rate, APR. This charge kicks in on any amounts you haven’t cleared at the end of the month. This may not be the case for some cards, for a card with a 0% introductory rate on making purchases, you may be exempt from having to pay this fee for a period.
Interest fees can be a particular risk when using your card for certain kinds of transactions. Withdrawing money from a bank machine with your credit card is usually not a good practice. As soon as you make the withdrawal, you will start incurring a high interest rate (usually in the region of 28%) straight away. This is called a “cash advance”, and should be avoided where possible, especially since another fee for cash withdrawals of roughly 2% will also be charged immediately on the amount withdrawn.
When using your card, be aware of your credit limit. A credit limit fee will be charged if you exceed this limit. You’ll also have a minimum repayment defined for your card usage, and you need to make this repayment each month. If not, you’ll be charged what’s known as a “default charge”. Both the credit limit fee and default charge usually amount to around £12.
Using your credit card abroad can be a bit of a minefield, and there are a variety of possible charges depending on your card. When making purchases with your card abroad, you could be charged for the conversion fee, so choose to pay in local currency where possible. In any event, you’ll probably be charged around 3% per transaction. Avoid using your card to buy foreign currency, as this could entail charges from both the currency provider and your credit card company. And withdrawing cash abroad is also not ideal with your credit card, since you’ll be charged around another 3% on the amount withdrawn.
Balance transfer fees are something else to be aware of, but in general for most people using a balance transfer, the benefits outweigh the costs. Balance transfers are useful for reducing credit card debt, since you can transfer the debt to a card with a more economical interest rate setup. This can be very useful for getting any outstanding debt under control. However, the transfer has charges involved, often around 3% depending on the card (with some charging a much lower fee).
There are many kinds of credit card fees to be aware of, but thankfully these days the provider needs to be upfront about them, and with a little research you can easily learn what fees apply to your credit card use, and have that info in mind when making transactions. You will then be able to use your card with peace of mind that you’re not racking up unknown charges.