When reviewing a credit card agreement or billing statement, you’re likely to come across some unfamiliar terms. There are many different types of fees associated with credit cards, and you’ll have an easier time managing your finances if you understand how they work.
The two best reasons for using a credit card are security and rewards. Some of the most common things to charge on a credit card are online purchases—partly because cash isn’t an option over the internet, but also because a credit card is more secure when shopping with unfamiliar sellers. If the online seller doesn’t follow through with a purchase, or if fraud occurs, you can notify your credit company to avoid being charged. Using a credit card to purchase gas is also a good way to take advantage of your card’s security, since credit card numbers are often stolen at gas stations.
If your credit card offers a rewards program, it can also be a good idea to charge large purchases. Expensive items result in more points that can be redeemed for perks like cash, statement credit, gift cards, merchandise, and more. It also makes sense to pay for everyday expenses that are already in your budget, such as groceries and streaming services, to earn more points on things you would purchase anyway.
When applying for a new credit card, it’s important to consider its annual percentage rate (APR). This the price you’re paying to borrow money, and it’s presented as a yearly percentage. The APR can vary by card and by person, so you should carefully research and read the terms in a credit card agreement before opening an account. A low interest rate is better, and some cards may offer special introductory rates for a period of time.
The fees that may come along with your credit card are also an important factor to consider when choosing one that seems right for you.
With so many potential credit card fees to understand, use this quick overview to understand some of the most common types:
An annual fee is charged once per year and usually ranges anywhere from $95 to more than $500. Not all credit cards require an annual fee, but those that do sometimes offer more rewards and benefits.
Sometimes referred to as a finance charge, interest is determined by the APR and balance on a credit card. You can avoid paying interest by ensuring that your balance is paid in full each month. If you’re not sure whether you can pay your balance in full every month, be sure to choose a credit card with a low APR.
A late fee is charged when you fail to make your minimum monthly payment before its due date. It’s charged once per billing cycle, so you can end up with multiple late fees if you continue to delay payment. Credit companies will sometimes waive a late fee if it’s your first offense.
When you transfer your balance from one card to another, a fee may be charged. This fee is usually a percentage of the amount you transfer. Balance transfer fees are often associated with balance transfer cards, which can help reduce debt by offering a low interest rate. To evaluate whether the balance transfer fee is worth paying, calculate how much money you’ll save with the lower interest rate and compare it to the fee.
Your credit card has a limit, which caps the amount of money you can borrow. If a purchase exceeds this limit, you can opt in to an over-the-limit fee of up to $35. If you decide not to opt in, then your purchase will instead be declined.
A cash advance allows you to borrow an amount of cash that is then added to the balance on your credit card. Cash advances are generally accompanied by a fee of 3-5% with a $5-10 minimum, plus a separate, higher interest rate and potential ATM fees.
This fee is charged by some credit cards on purchases made outside of the United States, or online in another currency. Travel credit cards often do not charge this fee.
If there are insufficient funds in your bank account for your credit card payment, your payment may be returned and your credit company can charge a fee.
Generally, you’ll want to avoid any extra fees associated with your credit card. However, some may be offset by certain bonuses that come with the card. For example, if you’ll receive a one-time bonus of money or rewards points for signing up, then calculate whether that bonus outweighs the card’s annual fee. It might make sense to pay the fee and reap the extra rewards. Similarly, a balance transfer fee could be offset by a low or 0% APR, meaning that you’ll ultimately pay less interest. By learning about fees and comparing different credit cards, you can make an informed decision about what fits into your finances.