Credit Card Fees: Hidden and Otherwise
Annual fees, grace periods, balance transfer options…it's a wonderful world of credit card jargon out there, and depending on your needs and planned uses for credit cards, it pays to look at your options.
Following are the various ways in which credit card companies can get some money out of you:
All credit cards levy an interest rate, the main difference being the percentage charged. Obviously you want to choose the card with the lowest rate. If you already have a card with a higher interest rate but that you like for other reasons, then try calling and asking for an interest rate reduction. According to a 2002 Public Interest Research Group study, 56% of people who called their credit card issuer and asked for a reduction were successful.
Early Interest Posting Dates
If you are in the market for a new card, find out if interest is charged from the date the charge is posted, or the date of purchase. Most will now charge from the date of purchase (which is usually a few days earlier than the posting date), but if you can find one of the other kind, it may be worthwhile.
This is only really an issue if you plan to carry a balance on your credit card at any time, which if it can be avoided, would be preferable.
How Interest is Calculated
Some cards will charge interest on the balance owing at the month or billing cycle's end. Makes sense, right?
Well, there is a growing trend now to charge interest instead on the average daily balance. So if you charge $1,500 in September, and pay $1,000 of it off on the due date, the following month you will actually be charged interest on the $1,500 average daily balance instead of the actual $500 left owing.
Grace Periods - or Lack Thereof
Usually, a grace period will allow for a responsible credit card user to pay off all their purchases within 24-30 days without paying any interest.
But as some readers pointed out in the comments on another article, even those dutiful credit card users who pay off their balance in full each month can sometimes get duped by circumstance (like the bank processing a transfer late) and miss the payment due date by a sliver.
For those people above and for those who regularly carry balances, even grace periods won't save you: if you have an outstanding balance, you are charged interest on new charges from the date of purchase. (All the more reason not to carry a balance)!
In a world of increasing fees for every little thing from booking airline tickets to doing your banking, credit cards are no exception to this bandwagon. The latest in nuisance fees can include:
- Late payment fees (as high as $40)
- Over-the-limit fees (as high as $25)
- Inactive account fees
- Not carrying a balance fees (or carrying a balance under a certain amount)
- Monthly fees that are a percentage of your credit limit
- Annual flat fees
- Balance transfer fees
- Credit limit increase fees
- Set-up fees
- Return item fees
- Fees for paying by telephone
…and on it goes.
Cash Advance Interest Charges
Many cards charge higher interest rates on cash advances in addition to transaction fees.
What They Have to Tell You About
When you are searching for a new credit card, the following items are required by law to be disclosed:
- Annual Interest Rate (also called annual percentage rate or APR)
- The teaser or introductory rate, along with the details of when and how the regular rate kicks in
- How the variable rate is determined (if applicable)
- Penalties for late payments
- Annual, periodic, or membership fees
- How the balance is computed for interest purposes (ie: average daily balance or balance owing methods)
- Minimum charge
- Grace period (the period of time you have to pay off the balance without incurring interest)
My Card Sucks! I Want To Cancel
If after reading this you think you have one of those cards with too many fees, you can cancel it. However, there is a chance that it may reduce your credit score. Check out FICO to find out what FICO scores consider, as well as how best to understand your credit score.
To that end, you should be aware of soft and hard closes, and how they affect you.
With a soft close, the credit card company will acknowledge that you want to close out the card, but they will automatically reactivate it if charges go through. Their rationale is that they are saving you embarrassment of the card being rejected if you happen to be out shopping and inadvertently whip their card out!
Hence, a soft close will also often affect your credit score and ability to qualify for large loans later on if the lender does a credit check and sees that you have all sorts of credit available to you, but doesn't see that the credit is soft closed.
It also makes you vulnerable to fraud, since if a professional steals your identity, they can order another card from a soft-closed account and start charging.
Ensuring your account is hard closed entails a little more follow-up work, but can pay off in the end. You must first request a hard close when you are cancelling the card, and follow up with a confirming letter. In your letter, tell the credit company to report "closed by consumer" to the credit bureaus as well, and keep copies of everything.
Some issuers will refuse to do this: their policy might instead be to process a soft close first and a prescribed time period, at which point it reverts to a hard close. Find out how long that period of time is, and ensure that the account is hard closed with a letter at the end of that time.