Understanding Credit Card Fees

It’s no secret that credit cards come with fees. It’s important to understand exactly what these fees are for so that you can avoid them if possible, or at least know what you’re being charged. When you look at your credit card bill and have to wonder “what is this billing fee for”, you cause yourself unneeded frustration and confusion. Most credit card fees fall into one of two groups; transaction fees or penalty fees. Transaction fees are related to the use of your account and include:

The other category for bills is penalty fees. These are extra fees that get added on as a result of you breaking any of the rules in the credit card agreement. These include:

Transaction Fees

As mentioned, these fees are incurred as you use your account. Some of these fees are optional so you do not have to have them on your account, but some are mandatory. Make sure your credit card bill clearly identifies what every fee is so that you’ll know which ones you can opt out of.

  • Reward Redemption Fees: These are fees are connected with rewards credit cards. While you may have the ability to rack up frequent flier miles or purchase gift cards with accrued points, it may cost you to actually redeem your reward. Not all reward cards charge fees for this service, so it’s important that you check your agreement to find out. These fees can range from $15-50.
  • Foreign Transaction Fees: These are fees for doing business with a foreign bank or financial institution. If you make a purchase with your credit card with a foreign bank be prepared to pay this fee. For some purchases the fee is used for currency conversion; however it is now imposed even when making purchases with dollars. The fees are charged as a percent of the purchase. The amount will vary on your bank/credit card company’s policy but generally it’s between 1-5%.
  • Annual Fees: These fees are incurred simply for having the credit card. These are usually for charge cards, secured cards, and some prepaid credit cards as well. It’s considered a convenience fee, so make sure you’re getting all the benefits out of your card that it offers since you’re paying for the card. The good thing is that it’s only charged once a year and can sometimes be avoided. Some banks don’t charge you the annual fee if you spend over a certain amount or may only charge it one time. The fee varies.
  • Billing Fees: With the move towards a more “green” lifestyle, many banks/financial institutions are charge people who opt for paper bills. Since most banks offer online banking that allow you to view your statements and monitor your usage, paper statements are becoming a thing of the past. However if you prefer to receive a bill every month, most companies charge $1-2 to send the bill.

Penalty Fees

These are the most hated fees; however they are sometimes necessary to deter customers from breaking the credit card contract. Penalty fees are 100% avoidable if you stay within the terms of your agreement. Watch your spending and pay on time and you will stand a good chance of avoiding these fees.

  • Late Fees: This is probably one of the most common fees. If you pay after your due date you will most likely incur a late fee. Something that some don’t know is that late fees are also imposed if you make payments for less than the minimum amount. Late fees are used by banks to encourage card holders to pay on time. Late fees are either a flat rate or based on the amount of your balance. Keep in mind that some banks may give you a grace period, but you have to check your agreement to find out whether or not your credit card offers one and how long the period is.
  • Activity Fees: These fees get tacked on due to inactivity on your account. If you don’t spend over a certain amount, you may have to pay a penalty fee. This is something you should look into prior to applying for your credit card. If you know you don’t plan on using your credit card often, save yourself some money and go with one that doesn’t have this fee.
  • Reward Recovery Fee: Credit cards that offer rewards may punish you for being late on your payment by taking away your reward points. You will have to pay a fee to retain any reward points that you have earned which is usually around $15-30. Some banks completely take away your reward points if you miss a payment and make you start from 0 again.
  • Over the Limit fees: Just as the name suggests, this is a fee for having a balance that exceeds your credit limit. If you take out cash advances or charge for more than your limit allows your credit card company will hit you with a fee. Another way to exceed your credit limit is through finance charges. If your interest continues to build and you’re not making payments eventually the amount you owe could be larger than your credit limit.

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