Many of the clients that come to Credit360 come with credit card debt, and while several factors can cause debt, there are multiple fees attached to owning a credit card that make it easy for debt to accrue so quickly. Due to the negative effects of credit card fees, our team of credit repair consultants take the time to examine clients’ credit histories and identify any fees that damage credit scores. While we provide quality service to fix credit, we also think it is beneficial to be proactive about repairing credit which is why we’ve highlighted several costly credit card fees that may affect your credit score.
Six Common type of Credit Card Fees
Late Credit Card Fees
When a credit card payment is missed, the credit card company will apply a late fee to the next bill cycle. The price depends on the type of credit card owned, but the charge can range from $25 – $40. However, the cost of the fee will increase if late payments are a repeated pattern.
Missing payments will not only cause late fee charges, but credit companies will charge interest fees on the late fee, and it can increase the annual percentage rates (APR). The credit company will charge interest charges on top of the late fee, drastically increasing the owing balance in the next billing cycle. Additionally, if a payment is late after 60 days or more, the credit card company will issue an APR penalty. Credit card companies do this because when a cardholder misses a payment, the card issuer assumes the risk that the cardholder will not make the payment. Thus, card companies use APR penalties to counterbalance the risk and encourage cardholders to make their payments on time.
In addition to late fees, interest charges, and APR increases, missing a payment negatively impacts a credit score because it appears on credit reports. According to Equifax, payment history accounts for 35% of credit scores, which means that one or more missed payments will immediately be reflected on credit histories.
You can avoid late fees by making payments on time. You can achieve this by setting automatic payments through your bank provider. Also, you can download the Credit 360 app to schedule payment reminders, which will notify you when payments are due!
Annual Credit Card Fees
Credit cards that offer rewards like travel perks, cashback, airport lounge access, etc., charge an annual fee. An annual fee is a fee that is charged yearly for owning a credit card. Annual fees can range anywhere from $50 – $100, and luxury cards can charge $700. The annual costs vary depending on the luxury of the perks provided. In other words, the better the perks, the higher the annual fee.
If you prefer not to receive any credit card perks and don’t want to be charged an annual fee, then look for credit cards that don’t charge yearly fees. But if you are someone who wants to take advantage of credit card perks, research to find the best perks that benefit your lifestyle while charging a reasonable annual fee. You can also negotiate with the card lender to waive the annual fee for the first year or look into credit card promotions offering annual fee waivers for the first year on premium cards.
Inactivity Fee/Dormancy Fee
It’s good to own credit cards even when not used because it adds to the credit utilization ratio. The credit utilization ratio measures the amount of credit used in the ratio to credit owned across all credit cards. So owning an unused credit card will secure a high credit utilization with low credit use.
However, owning an open and unused credit card may be subject to an inactivity or dormancy fee. An inactivity fee is a charge that credit card companies apply if the credit card is not in use for a certain period of time or if the card does not meet the yearly credit use.
If you own an old, open, unused credit card, check if the credit company has applied any inactivity charges. You can also call your credit card company and ask them to waive the inactivity fee for the first year, but the cost will be implemented in the next year and so on. Ensure to always read the credit card agreement details to see if a credit card comes with an inactivity fee. If you own a credit card with an inactivity fee, use the card to an extent or cancel the card entirely.
Cash Advance Fee
Credit cards offer cash advances that allow cardholders to withdraw money from the account. However, doing this will cause a hefty cash advance fee applied by the credit issuer on the next bill. Traditionally, a cash advance fee can range from 3%-5% of the total amount withdrawn.
For example, a $300 cash advance with a 5% fee will cost 15$.
On top of the cash advance fee, an interest charge applies to the amount withdrawn. So if a cardholder frequently uses cash advances, it will cause a surge in cash advance fees and interest charges, which may be challenging to pay off. Also, frequent use of cash advances will cause credit companies to increase the card’s APR because they see the cardholder as dependent on credit.
One way to avoid cash advances is not to withdraw cash or explore cards that offer a lower interest option. Ensure always to read the credit card agreement to know the cash advance percentage.
Balance Transfer Fee
Credit cards offer zero-interest or low-interest periods if a credit balance on one card is transferred over to a new card. A balance transfer is beneficial to those who own a credit card with a high balance and another credit card with a low balance. When the higher balance is transferred over to the lower balance card, a zero-interest period will accumulate on the transferred balance. Balance transfers give time to pay the balance without paying extra interest.
However, there is a balance transfer fee for transferring the amount over. A typical balance transfer fee can cost between 3%-5% on balance. For example, if a $4000 credit transfers with a 5% fee, there will be a $200 balance transfer fee.
In addition to the balance transfer fee, there is a catch. Suppose you own two credit cards and both cards have a $600 balance, and you’re offered a balance transfer for one of the cards. If you decide to transfer the balance, any payment made to the card will only cover the 0% interest balance, whereas the other balance will continue to accumulate interest. Thus, when accepting a balance transfer, make sure it benefits you and your financial situation.
Return Payment Fee
If a credit card payment is made with insufficient funds, an automatic return payment fee will be applied. Return payment fees can cost between $25-$40. Return payment fees usually occur when an automatic payment is set and the credit card company is authorized to withdraw charges from the set bank account. If you have automatic payments going out, make sure the amount being taken out is in your account to avoid returned payment fees.
The six listed credit card fees are the most common charges that credit card companies apply. With that said, there are still several other existing fees to be aware of! Before applying for a new credit card, read the card agreement to learn and understand the interest rates, fees, and advantages of credit card, and see if it benefits your lifestyle and financial situation.
Written By: Indojaa Sathiyaseelan
