Credit Cards. They’re an established fact of our daily life and economic system. But while many people use them, a lot of us don’t really understand what it is we’re getting into when we sign up for a credit card. With that in mind, in this FX101 we help you to better understand credit card fees so that you can spend, and ultimately save, better.
The basic principle of credit is fairly straightforward. The borrower is spending money that is not their own, on the condition that they pay the money back. The moneylender (in the vast majority of instances today: the bank) is motivated by the rates they charge for lending their money. These rates are known as interest and, with regards to credit card fees, it is interest rates that the majority of us are most familiar with.
When it comes to credit cards, we borrow money on the expectation that we pay it back every month. We are charged interest when we fail to pay off our card balance from one month going into the next. If the card balance is not paid in full by the due date each month, we incur interest.
But how is your interest determined? Well, interest fees are determined by the Annual Percentage Rate (APR) of your card. APRs (i.e. interest fees) vary; but generally, if you are considered a riskier borrower by your bank, your APR and interest fees will be higher to offset the risk. If you are a prime customer with sufficient assets and a good record of paying off your credit, your APR will likely be lower.
Unironically, your APR can be lowered by paying off your credit card balance in full on time every month; and if you wish to avoid paying interest fees, this is how you do it.
Annual fees are by no means universal among credit cards. There are plenty of credit cards out there that charge no annual fees. But when a credit card does come with an annual fee attached, it usually means that that card offers unique perks or privileges that aren’t available with a card with no annual fee. Perks can vary, but the highest annual fees are usually associated with premium benefits such as travel rewards and access to airport lounges.
Annual fees often provide good value and can save you money in the long run. Before selecting a credit card with an annual fee, it’s a good idea to calculate whether the cost of the card is outweighed by the rewards it offers. If not, there are plenty of cards to choose from that charge no annual fees.
This is another fee that many of us may have encountered. An overlimit fee is incurred when you spend over the maximum balance on your credit card. These fees are typically found in the $25-30 range for bank-issued credit cards. Especially if your maximum balance is relatively low, it can be easy to rack up your balance quickly. Even just a couple of high ticket items can put you over the top.
In order to avoid overlimit fees, keep track of your spending and keep within your limits. In the worst case, if you’re getting close to the credit limit, switch over to your debit card. pay off your card whenever you get close to your limit.
Late Payment Fees
Many banks charge late fees when you fail to make the minimum payment by your statement’s due date. Late fees can range between $15-40, and while more serious consequences are generally avoided if you pay the fee and balance within 30 days of the due date, they can get increasingly worse after the 30-day mark. After 30 days, the payment will show up on your credit report as late, your credit score may drop, and your interest rate can increase (if the payment isn’t made within 60 days).
The best policy? Make your payments on time, and keep your credit in good standing.
Cash Advance Fees
A cash advance is when you borrow cash from your credit card. Usually done via an ATM, a cash advance fee is typically the greater of a flat fee or percentage on the amount of cash borrowed. With most Canadian credit cards, this rate is 22.22%.
Foreign Transaction Fees
Many credit cards add a fee (usually 3% of the purchase price) on any transactions made in a foreign country or in a foreign currency. A good number of travel rewards cards, and certain business cards, don’t charge this fee.
Balance Transfer Fees
Balance transfers are where you pay off one credit card with another one, effectively transferring your debt. Credit card issuers generally charge a fee for balance transfer transactions, which will either take the form of a flat fee or a percentage of the balance transferred.
The best way to avoid incurring these fees is to not transfer your credit balance. However, in certain instances, it might make sense to do so. If you have two credit cards, with one charging high interest and another with 0% APR, transferring your balance from one to the other could be a good move. So long as the fee amounts to less than the interest you would have otherwise had to pay.
Returned Payment Fees
If you make a payment to your credit card company but have insufficient funds in your account to cover it, the bank will reject your payment. When this happens, your credit card issuer will charge a returned payment fee (typically around $35). Avoid this fee by ensuring you have enough money in your account before you pay off your credit card.
These days, credit cards are an everyday staple in the lives of most adults. But while a credit card makes a useful tool, there’s a lot to keep in mind to ensure you aren’t paying more than the card is actually worth. Having a general understanding of how the fees work will help you to make the most of your credit card and, most importantly, to save money.
Stay Informed. Stay Current.