You can avoid many credit card costs by using your credit card responsibly. Here are 9 slip-ups that can increase the amount you pay for the convenience of using a credit card.

1. Paying credit card bills late.

When you use your credit card, you agree to pay your minimum payment by the due date. If you’re late on your credit card payment, there are some costly consequences. You’ll get charged a late fee that could be as much as $39 in some cases. Then, your interest rate could increase, which would also increase your minimum payment. If you’re in the habit of paying the minimum on your credit card, the late payment fee could make it hard to get caught up on payments.

2. Going over your credit limit.

Your credit limit is the maximum amount you can charge on your credit card without being charged a penalty. If you go over your credit limit, you’ll be charged an over-the-limit fee. Just like with late payments, your interest rate could increase if you exceed your credit limit. The over-the-limit fee will make your minimum payment go up. If you don’t pay the late fee plus your regular minimum payment, you’ll be charged a late fee.

3. Misunderstanding balance transfer deals.

A six-month zero percent interest balance transfer offer is a good deal, if you can pay off the balance within six months. However, once the offer expires, you’ll be subject to a much higher interest rate. The interest rate could be so high that you negate all the interest you saved during the no-interest period. Before you do a balance transfer, make sure you understand the terms of the promotion. Check your budget to see whether you can afford to pay off the balance within the promotional period. If you can’t, it could be cheaper to leave your balance where it is.

4. Taking out a cash advance.

Cash advances are much more expensive than purchases of the same amount. That’s because cash advances have a fee and a higher interest rate. Not only that, interest begins accruing on a cash advance the day you make the withdrawal. So, you don’t get a grace period to pay off the balance and avoid a finance charge. Since cash advances have higher interest rates, you’ll face higher finance charges on the balance.

5. Failing to report unauthorized credit card charges immediately.

When your credit card is lost or stolen, it’s important to report the missing credit card as soon as you notice the theft. If you notice fraudulent activity on your account, let your credit card issuer know as soon as possible. If you wait more than 60 days to report credit card fraud, you could be liable for some of the charges.

6. Paying only the minimum.

Making minimum only payments is always more expensive than paying off your credit card balance quickly. The longer it takes you to pay off your credit card balance, the more you’ll pay in finance charges. If all you pay is the minimum, you could end up paying double the amount of finance charges than the amount you originally charged.

7. Making purchases just to get more rewards.

Reward credit cards can be very beneficial, when you can afford to pay off the balance at the end of every month. Abusing reward credit cards just to accumulate rewards is risky because you pay not be able to repay the balance. Plus, reward credit cards tend to have higher interest rates, so if you don’t pay off your balance quickly, you could end up paying more in interest than you received in reward benefits.

8. Failing to read your credit card mail.

Credit card issuers are required to send advance notification of certain credit card changes, like an increase in your interest rate. If you have a tendency to throw away unmarked mail or even your billing statement inserts, you could miss an important announcement about your credit card. These disclosures keep you from going over your credit limit, making purchases on a high interest rate credit card, or from trying to use a credit card that’s been closed.

9. Adding authorized users to your account.

When you add an authorized user to your credit card, that person is allowed to make charges on the credit card, but isn’t required to make payments. Instead, you, as the primary account holder, are responsible for paying all charges made on the credit card. So, if your authorized user maxes out the credit card and incurs an over-the-limit charge, it’s your responsibility. You have to decide whether that’s a risk you’re willing to accept.

Credit card companies want you to pay more credit card fees because it makes them richer. If you want to avoid paying steep fees for your credit card, pay attention to the terms and conditions of your credit card and avoid these costly credit card slip-ups.

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Annual Percentage Rate (APR)

The annual percentage rate or APR is the yearly cost of borrowing money using your credit card. The annual percentage rate is also known as the interest rate for your credit card. These days, the average APR for credit cards is around 12.5%. The higher your interest rate, the more you pay when you carry a balance beyond the grace period (more on grace periods below).

Your credit card could have several APRs. One for purchases you make on your credit card, one for balance transfers, and one for cash advances. Read What You Need to Know About Interest Rates for more information about your annual percentage rate.

Grace Period

The grace period is the amount of time you have to pay off balances before you have to pay interest on your purchase. The grace period typically only applies to new purchases made with you begin the billing cycle with a zero balance. You may not receive a grace period for certain types of transactions like cash advances and balance transfers. Instead, interest begins accruing on those balances immediately.

Grace periods are typically between 20 and 25 days depending on your credit card. Ideally, you have a longer grace period, giving you more time to pay your balance without receiving a finance charge.

Finance Charge Calculation Method

Your finance charge is the amount you pay when you carry a credit card balance beyond the grace period. Finance charges are calculated based on your credit card balance and your interest rate using one of several methods.

1. average daily balance method
2. daily balance method
3. ending balance method
4. previous balance method
5. adjusted balance method
6. double billing cycle method

You can learn more about finance charges in the article How Finance Charges Are Calculated and How You Can Avoid Them.

Credit Limit

The credit limit is the maximum amount you can charge on your credit card without receiving a penalty. You may have a different credit limit for purchases and cash advances. The cash advance credit limit is usually lower than the credit limit for purchases. If you exceed your credit limit, your card issuer may charge a over-the-limit fee and raise your interest rate.

Another reason to stay below your credit limit is to protect your credit score. The closer your credit card balance gets to your credit limit, the lower your credit score falls.

Credit Card Fees

Credit cards come with lots of fees and card issuers are continually coming up with more fees. Some typical credit card fees include:

• Late fee is charged when you miss your credit card payment due date or you pay less than the minimum payment. Some credit cards have tiered fees based on your balance. For example, you may pay a $10 late fee if your balance is less than $500 and a $20 late fee is your balance is above $501.
• The annual fee is a yearly fee charged for using your credit card.
• An over-the-limit fee is charged when you exceed your credit limit.
• You will pay a cash advance fee when you make a cash advance with your credit card. The cash advance fee might be a certain percentage of your cash advance, or it could be a flat fee.
• Returned check fee is charged with the check you sent for your payment is returned by your bank. If your check is returned, you might also face a late payment fee and a penalty interest rate increase.

These are not the only fees charged by credit card companies. To find out which fees your credit card charges, refer to your credit card agreement.

Credit Card Rewards

Your credit card may offer rewards as an incentive for using your credit card. Rewards are typically awarded as cash back or points that can be redeemed for discounts, merchandise, or services.

Rewards can be received as frequent flier miles that can be redeemed for airline tickets. Some reward credit cards allow you to accumulate points for a free stay in a hotel. Other cards give a certain percentage of cash back for your purchases.

With reward credit cards, you must be careful about overcharging for the sole purpose of accumulating rewards. It’s also important to know how you accumulate rewards, when they expire, the maximum amount you can accumulate, and the number you need to redeem them. All these factors come into play when you’re using a rewards credit card.

Other Credit Card Benefits

Some credit cards come with other fringe benefits that may be free, but more typically are offered only with credit cards that have an annual fee. These benefits include travel insurance, purchase warranty insurance, and car rental insurance. These insurance benefits are usually only offered when the purchase is made on your credit card.

How to Find Out Credit Card Terms

Most credit card features are included in a disclosure box that’s sent with your credit card application or solicitation. For your existing credit card, information about most features will be included on the back of your credit card statement. Otherwise, refer to your credit card agreement for information about your credit card features.

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There are six different ways that finance charges are calculated. They’re all based on some variation of your credit card balance during the billing cycle. Your balance is multiplied by your periodic rate rather than your annual percentage rate. The periodic rate is expressed on a monthly or daily basis.

Six Finance Charge Calculation Methods

1. Average Daily Balance

The average daily balance method of calculating finance charges is the method that’s most commonly used. In this method, your creditor averages your balance for each day during your billing cycle. Then, the average is multiplied by your annual percentage rate and the number of days in the billing cycle and the final number is divided by 365. The calculation looks like this:

( Average daily balance * APR * number of days in billing cycle )/365

2. Daily Balance Method

To calculate your finance charge using the daily balance method, your credit card issuer multiplies the balance on each day in the billing cycle by the daily rate to come up with a daily finance charge. Then, the daily finance charges are added together for your finance charge for the month. The daily rate is your annual percentage rate divided by the number of days in the year.

3. Ending Balance Method

If your credit card issuer uses the ending balance method to calculate your finance charge, then the balance at the end of your billing cycle is multiplied by the periodic rate to come up with your finance charge. To calculate your ending balance, your card issuer takes the balance at the beginning of your billing cycle then subtracts credits and payments and adds fees and new charges.

4. Previous Balance Method

The previous balance method multiples your balance at the beginning of the billing cycle by the periodic rate. Any payments or charges you make on your credit card during the billing cycle won’t affect your finance charge, at least not in this billing cycle. The balance at the end of your current billing cycle will be the balance at the beginning of your next billing cycle. So what you charge this month will impact the finance charge you pay next month.

5. Adjusted Balance Method

The adjusted balance method begins with the balance at the beginning of your billing cycle. The balance is adjusted based on any payments or credits made during the billing cycle. That adjusted is multiplied by the periodic rate to come up with your finance charge. You won’t pay a finance charge on charges you make during this billing cycle until the next billing cycle.

6. Double Billing Cycle Method

The double billing cycle method of calculating finance charges is the most expensive method of calculating finance charges. The calculation method is exactly like the average daily balance method of calculating finance charges, except the average daily balance from the current and previous billing cycles are used. That means, you end up paying interest on balances that have already been paid.

Fortunately for credit cardholders, a federal law that becomes effective February 22, 2010 bans the double billing cycle method of finance charges.

Which Method Does Your Card Issuer Use?

Federal law requires credit card issuers to give include details about the finance charge calculation on your billing statement. Refer to the back of your billing statement for details on which finance charge calculation method your card issuer uses. Your billing statement will describe how your finance charge is calculated even if it doesn’t specifically name the calculation method as we did in earlier in the post.

How to Avoid a Finance Charge

Finance charges are applied to balances that you carry beyond the grace period. You can avoid paying a finance charge by paying your balance in full before the grace period expires. Because credit card issuers are currently required to mail your billing statement 14 days before the due date, you may have to pay your balance before the billing statement comes. (As of February 22, 2010, billing statements must be mailed at least 21 days before the due date.)

You can only avoid a finance charge if you had a $0 balance at the beginning of the billing cycle. Otherwise, you won’t have a grace period and won’t be able to avoid the finance charge.

Cash advances and balance transfers typically don’t have a grace period. Instead, those balances begin incurring interest the day the transaction is complete. Unfortunately, you won’t be able to avoid a finance charge on either of those transactions. You can reduce the finance charge you owe by paying the balance sooner rather than later. That’s actually better in this situation since cash advance and balance transfer balances have a higher interest rate.

The finance charge for purchases, cash advances, and balance transfers are all calculated separately.

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2. The 8 Most Important Credit Card Terms
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You’ll pay a cash advance fee.

Cash advances aren’t free. A cash advance fee will be added to the balance of your cash advance. Credit card cash advance fees are calculated in one of two ways (or a combination of the two ways). You might be charge a cash advance fee that’s a percentage of the cash advance. The percentage is typically between 2% and 4%. That’s $2 to $4 for every $100 in cash you take out.

Some credit card issuers charge a flat fee regardless of the amount of the cash advance. For example, you might be charged a $10 cash advance fee regardless of whether you withdraw $100 or $1,000.

Finally, some credit card issuers use a combination of both these methods. For example, the card issuer might charge a fee that’s 3% of the cash advance or $5, whichever is greater. The minimum cash advance fee guarantees the card issuer receives a certain amount of money for your cash advance just in case, the percentage method is low.

You’ll pay an ATM fee.

If you use another bank’s ATM, you will probably be charged an ATM fee between $2 and $5. This is the same fee you’d pay if you used your check card with withdraw cash from another bank’s ATM. If your credit card issuer is a bank with ATM’s you may avoid the ATM fee by using your bank’s ATM. Otherwise, the fee will be added to your cash advance balance.

You’ll pay a higher interest rate.

One of the things that makes cash advances a bad idea is the higher interest rate. Cash advances nearly always have a higher interest rate than the interest rate that’s applied to your purchases. This means you pay more money for taking out a cash advance than you would making a purchase.

The cash advance interest rate is usually a few points higher than your purchase interest rate. Look at your credit card billing statement to learn your cash advance interest rate.

Interest starts accruing immediately.

Unlike purchases, cash advances don’t have a grace period, so interest starts being added to your balance starting on the day you take out the cash advance. By the time your billing statement comes in the mail, you’ll already have a finance charge on your cash advance, even if you started the billing cycle with a $0 balance.

Credit card cash advances are paid last.

If your credit card has multiple balances with different interest rates and a cash advance is one of them, your cash advance will probably be paid last.

Anytime you make a payment above the minimum, your credit card issuers can apply the payment to whichever balance it chooses. Card issuers usually apply any payment above the minimum to balances with the lowest interest rate, which is usually your purchase balance. Your cash advance balance, which will have a higher interest rate, may not have a payment applied to it. As a result, your cash advance balance may increase after finance charges are added. The longer it takes to pay off your lower interest rate balance, the higher your cash advance balance will become.

This method of applying payments to the balance with the lowest interest rate can only be used for a short period of time. After February 22, 2010, a new credit card law will require credit card issuers to apply any above-minimum payment to balances with higher interest rates.

How to Avoid a Cash Advance

These are some ways to avoid a credit card cash advance:

• Ask your employer for an advance on your paycheck. If there is a fee for an advance on your paycheck, it will pale in comparison to cash advance fees.
• If you can’t get an advance on your paycheck, consider working overtime to increase the amount of your next paycheck. Make sure you get approval ahead of time.
• Sign up for your bank’s overdraft protection. With overdraft protection, your bank uses a line of credit to cover transactions for which you don’t have enough money in your checking account.
• Borrow money from a family member or friend. They may not charge a fee at all for loaning money to you.
• Get a small loan from your bank. A loan will have a lower interest rate than a cash advance and will cost less if you pay it off quickly.
• Build an emergency fund and use it instead of borrowing money when you run into a financial emergency. An emergency fund must be planned and built well ahead of time.
• If you need money immediately, sell some items on eBay or Craigslist to earn cash.

If You Must Use a Cash Advance…

Realize that cash advances are expensive. Use a credit card that doesn’t have a balance so you can pay your cash advance back quicker. You can reduce the cost of a cash advance by paying it back by the time the billing statement comes rather than over a period of time.

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1. How Finance Charges Are Calculated and How You Can Avoid Them
2. 7 Reasons to Pay Off Credit Card Debt
3. 5 Reasons to Check Your Credit Report

What is an interest rate?

The interest rate is most often stated as an annual percentage rate. This is the annual cost of carrying a balance on your credit card. Since credit card interest is charged on a monthly basis, credit card companies typically use a periodic interest rate which is just your APR divided by the number of billing periods in the year. For example, if your APR is 12% and you are billed 12 times a year, your periodic interest rate is 1% (12 divided by 12).

How does the interest rate affect my credit card?

Your interest rate, or APR, comes into play when you carry a credit card balance beyond the grace period. The grace period is the amount of time you have to pay off a credit card balance without receiving interest charges. Grace periods are typically 21 days.

When you carry a credit card balance, your balance is multiplied by your periodic rate to come up with your finance charge – that’s the monthly interest charge you pay. The higher your interest rate, the higher your finance charges will be.

Types of Interest Rates

There are several different types of interest rates. We’ve already discussed the annual percentage rate and the periodic rate. There are more.

Variable vs. fixed interest rate

A fixed interest rate is an interest rate that doesn’t (easily) fluctuate over time. Fixed credit card interest rates are allowed to increase, but only under circumstances and you must be notified before the interest rate increases.

A variable interest rate can fluctuate and your credit card issuer doesn’t have to let you know when your variable rate is increasing. Variable interest rates are typically tied to another interest rate, most often the national prime rate as published by the Wall Street Journal. If your credit card has a variable interest rate it’s typically stated something like “16.74% plus prime.”

The purchase interest rate is the interest rate applied to purchases you make on your credit card. Depending on how you use your credit card, it may be the only interest rate you ever have to deal with.

The cash advance interest rate is the interest rate applied to cash advances – cash withdrawals made against your credit card balance. Cash advances don’t have a grace period and interest starts being added right away.

The balance transfer interest rate is the interest rate that’s applied to a balance transfer. You may receive a promotional balance transfer interest rate. These promotional rates are often low, i.e. less than 5%, and last anywhere from 3 months to 12 months.

The default or penalty interest rate is the interest rate you get charged for defaulting on your credit card terms. Default includes things like making a late credit card payment or going over your credit limit.

How payments are applied to balances with different interest rates

This is how things are done now:

When you have different balances with different interest rates on a single credit card, any payment above the minimum does toward the balance with the lowest interest rate. No payments are applied to the balances with higher interest rates, so they continue to accumulate finance charges until the lower interest rate balance is completely repaid.

How things will be next February:

New rules go into effect February 22, 2010 that will change the way payments are applied to balances with different interest rates. Card issuers will be required to put any payment above the minimum toward the balance with the higher interest rate. This saves you money in the long run.

What causes credit scores to go up?

Your credit score could rise for a number of reasons. It could be something you did or it could have been the credit card company’s way of trying to make more money.

You could cause your interest rate to increase because you:

• Paid late on your credit card
• Maxed out your credit card balance
• Wrote a bad check for your credit card payment
• Didn’t abide by the credit card terms
• Used your credit card illegally

What to do when interest rates go up

If your credit card interest rate goes up, the credit card issuer is required to give you at least 45 days advance notice. During that 45-day period, you have the right to reject the new credit card interest rate. If you reject the new rate, you’ll have the chance to pay off your balance at your older, lower interest. However, you’ll be required to close your credit card. Before you opt-out of the new rate, make sure you’re really ready to lose the credit card.

Credit card issuers don’t have to give advance notice if they’re increasing your interest rate because you defaulted on your credit card. If it’s your first late payment, your lender may be lenient and lower your interest rate. Otherwise, after six months of timely credit card payments contact your lender and request your old rate. Starting February 22, 2010, your lender has to lower your rate after six months of timely payments.

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Your credit card issuer will send you a statement each month that details your credit card balance, your required minimum credit card payment, and the payment due date. You must make at least the minimum payment by this due date to avoid serious penalties.

What Happens When You Make a Late Payment

Making a late credit card payment has several consequences, some of them more severe and costly than others.

You’ll be charged a late fee. Credit card issuers assess a late payment fee each time your credit card payment is late. Some card issuers charge a flat fee, like $39 for each occurrence. Other card issuers have a tiered fee based on your credit card balance. For example, you may pay a $15 late fee if your balance is under $1,000 or a $30 late fee if your balance is over $1,001. Information about your late fee should be printed on the back of your credit card statement.

If it’s the first time you’ve been late on your credit card payment, your card issuer may have mercy and waive your late payment fee.

Starting February 22, 2010, credit card issuers can’t charge a late fee if your payment was received late because of a recent (60-day) change in their payment mailing address. Also, if the creditor made a change in their payment processing system that resulted in your late payment, they’re not allowed to charge a late fee.

Your interest rate may increase. Credit cards typically have a penalty rate that goes into effect whenever you default on your credit card terms, for example making a late payment. The penalty rate (also known as the default rate) is often significantly higher than your regular rate. It’s common to see a default rate as high as 29.99%.

New credit cards that go into effect February 22, 2010, prevent credit card issuers from defaulting your credit card interest rate unless you’ve been at least 60 days late on your credit card payment. Not only that, card issuers will be required to review your payment history after six months and lower your rate if your payments have been timely.

The late payment will go on your credit report. Your credit card payment history is updated on your credit report on a monthly basis. Just as timely payments are included on your credit report, so are late payments. Late payment information remains on your credit report for seven years from the date it occurred. If you’re seldom late on your credit card payment and if you call your customer service department quickly, you may be able get your creditor to waive the late payment listings.

Your credit score may go down. Payment history is 35% of your credit score. In fact, it has the most impact on your credit score. A late payment that’s updated on your credit report will cause your credit score to fall. The more delinquent you are on your credit card payment, the more your credit score will be hurt. Fortunately, as late payments get older and you add more positive payment information to your credit report, those late payments hurt less.

Is It Ever Ok to Pay Late?

The quick answer is no, it’s never ok to pay your credit card late, not in response to a new fee introduced by your credit card company, not because your credit card interest rate has increased, not for any reason. The general rule is: pay your minimum payment by the due date or face the consequences. If you make a partial payment or send anything less than the minimum payment, you’ll still be considered less.

Exception for Billing Errors

You may be able to postpone your credit card payment if there is an error on your billing statement and you have notified your card issuer, in writing, of the error. You can only withhold payment on the portion of the balance that’s in question. So, if you’ve disputed your entire credit card balance, you don’t have to make a payment until the credit card issuer has completed its investigation. However, if there is a portion of your credit card balance that hasn’t been disputed, you must make the minimum payment on that balance.

For example, you ordered $150 grill on your credit card, but never received it and disputed the charge with your credit card. You had a $0 balance before you made the purchase. You are not required to make your minimum payment.

Let’s take the same purchase, but assume you had another $100 purchase on your billing statement. There is no dispute for the $100 purchase, then you must make your minimum payment.

Why You Should Pay Your Credit Card on Time

Paying your credit card on time saves money and protects your credit score. Paying your credit cards on time shows future creditors and lenders that you can be trusted to repay money you borrow. They’re more willing to loan money to you show you can pay on time.

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Annual percentage rate

The annual percentage rate or APR is the interest rate that’s charged on your credit card balance. The rate is stated as an annual rate, but typically applied to your balance as a daily rate. You can calculate your daily rate by dividing your APR by 365. The daily rate is the rate that’s usually used to calculate finance charges.

Balance transfer

A balance transfer is a type of credit card transaction that involves moving the balance of one credit card (or even multiple credit cards) to another. When you transfer a balance, you will likely have to pay a balance transfer fee, which can be a fixed amount or a percent of the balance transferred.

Unless you receive a promotional balance transfer offer, your interest rate on the balance transfer will likely be higher than the interest rate charged for purchases. There is no grace period for balance transfers. Interest begins accruing immediately.

Billing Statement

Each month your credit card company will send a statement listing the purchases, fees, credits, and interest charges made to your account. The statement will include your minimum payment due, the due date, and the payment mailing address.

Billing statements are usually mailed once a month and include all the transactions made to your account within a billing cycle – the period of time between each credit card bill.

Starting February 22, 2010, credit card companies must send your billing statement 21 days before your payment is due. If the balance has a grace period, you must receive your billing statement at least 21 days before finance charges will begin.

Cash advance

A cash advance is a cash loan on your credit card. You can take out a cash advance by withdrawing cash from an ATM or cashing a convenience check included with your credit card statement.

When you take out a cash advance, you’ll have to pay a cash advance fee. It might be a fixed fee or a percent of the cash advance. Interest rates on cash advances are usually higher than those rates applied to purchases. Cash advances don’t have a grace period, so interest begins accruing immediately.

Credit limit

Your credit limit is the maximum amount you can charge on your credit card without receiving a credit-limit fee.

It’s important to watch your credit card statement for changes in your credit limit because they are often unannounced. Your credit limit could be unexpectedly reduced, leaving you with less available credit.

Grace period

The credit card grace period is the amount of time you have to pay your balance in full without receiving a finance charge. Grace periods are typically between 21 and 25 days, but can be shorter or longer depending on the credit card issuer. Longer grace periods are better because they give you more time to pay your credit card balance and avoid interest charges.

Certain types of transactions, like balance transfers and cash advances, don’t have a grace period. Whenever you make one of these transactions, interest begins accruing on the balance right away. Similarly, if you carried a balance from the previous billing cycle, new purchases may not receive a grace period.

Finance charge

The finance charge is the cost of borrowing using a credit card. It’s calculated by multiplying your balance by the annual percentage rate (or some fraction of it). There are various methods of calculating your finance charge.

• The average daily balance method is most common and uses the average of your balance each day during the billing cycle.
• The adjusted balance method doesn’t include purchases made during the billing cycle. Instead, your balance subject to finance charge is calculated by subtracting payments and credits made during your billing cycle from your balance at the beginning of the billing cycle.
• The previous balance method uses only the balance on your credit card at the end of the previous billing cycle.
• The double billing cycle method uses the average daily balance from the current and previous billing cycles. This is the most expensive method of calculating finance charges because it forces you to pay interest on balances that have already been paid. Beginning February 22, 2010, credit card issuers can no longer calculate your finance charges using this method.

Many credit cards have a minimum finance charge that you will be charged if your calculated finance charge falls below a certain amount. For example, if your finance charge is calculated to be $0.15 and your credit card’s minimum finance charge is $1,00, you’ll be charged $1.00.

Minimum payment

The minimum payment is the lowest amount you can pay on your credit card balance each month to avoid a late payment fee. The late payment fee is assessed whenever your credit card issuer doesn’t receive your minimum credit card payment by the due date. The minimum payment may be a fixed amount like, $25, or it can be a percent of your balance, like 5%.

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1. How Finance Charges Are Calculated and How You Can Avoid Them

Why Do Credit Card Fees Matter?

The more you spend on credit card fees, the less money you have to spend on other things. Credit card fees increase the cost of credit cards and make them less attractive. After all, is it worth the convenience of delaying payment if you have to pay upwards of $100 for the convenience? Of course not. Why make the credit card companies even richer by paying credit card fees if you don’t have to? Read on to learn more about common and not-so-common credit card fees and how you can avoid them.

Credit Card Fees

An annual fee is a yearly fee assessed by some credit card issuers just for having the card. Some credit card issuers charge the annual fee at the beginning of the year whether you make charges on the card or not. Depending on your credit card, you may be able to avoid the annual fee by charging a certain amount in purchases every year.

The late fee is added whenever the minimum credit card payment is not received by the due date. Your credit card may have a flat late fee like $39 or a tiered late fee that increases as your balance increases. If your payment is received on time, but is less than the minimum payment, you may still be charged a late fee.

Whenever your credit card balance exceeds your credit limit, you can be charged an over-the-limit fee. Some credit card issuers like American Express and Discover have stopped charging an over-the-limit fee to cardholders who go over their credit card balances. Starting February 22, 2010, card issuers must ask you if you want them to approve over-the-limit charges. If you say “no,” those charges will be declined and you can avoid the fee.

A cash advance fee is charged when you take out a cash advance against your credit limit. Credit card convenience checks, sometimes included with your billing statement, are often treated as cash advances. Certain types of purchases, like lottery tickets and cash advances, are also considered cash advances. The cash advance fee could be a flat fee, like $50, or a percentage of the cash advance, like 3%.

A balance transfer fee is assessed when you transfer balances from one credit card to another. Like a cash advance fee, this fee might be a flat fee or a percentage of the balance being transferred. Note the balance transfer fee is charged by the credit card receiving the new balance.

If your bank returns your payment check for non-sufficient funds, your card issuer might charge a return check fee. Avoid this fee by making sure you have enough funds in your account to cover all your pending transactions.

The finance charge is a monthly interest charge that’s assessed whenever you carry a balance beyond the grace period. Finance charges are based on your account balance and annual percentage rate (APR). The higher your balance and APR, the higher your finance charge will be. You can avoid a finance charge by paying your account in full before the grace period ends.

The inactivity fee is a relatively new fee that’s charged by credit card issuers to penalize cardholders who don’t use their credit cards. Use your card periodically to avoid being charged an inactivity fee. Make small purchases on your credit card and pay them off when the bill comes.

An application fee is charged when you apply for a credit card. Some credit card issuers charge an application fee and some do not.

Foreign transaction fee, also called a currency conversion fee, is charged when you use your credit card in a foreign country. Fees range between 1% and 3% of the transaction. Read your credit card agreement to learn whether your credit card charges a foreign transaction fee. Currently, Capital One is the only credit card issuer that doesn’t charge this fee.

Watch Out for Hidden Credit Card Fees

Some credit card companies charge fees for things that cardholders would consider a convenience. For example, you may be charged a fee to receive a duplicate billing statement or to make your credit card payment over the phone. You could be charged a fee for a replacement card or to add an authorized or joint user to your account. Note that after February 22, 2010, credit card issuers can’t charge you for making a payment, regardless of the method, unless it’s an expedited payment.

When you sign up for a credit card, read through the credit card disclosure to get a listing of most fees associated with the card. Once you start using a credit card, continue to watch your billing statement every month. If you find unexpected fees, call your card issuer for an explanation and details about getting the fee waived and avoiding it in the future.

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When you’re on the market for a new credit card, look at all the features, not just one or two them, to make pick the right credit card for you.

Shop around.

You’ll see credit card advertisements around the web and may even receive credit card offers in the mail. Don’t sign up for the first credit card you see. Instead, review the credit cards you receive and compare them to see which card offers the best deal. If you’re interested in a bank and don’t have an offer from them, visit their website to see what cards are available.

Decide how you’re going to use the credit card.

Different credit cards have different purposes. It’s smart to pick a credit card based on how you’re going to use it. If you’re planning to carry a balance on the card, meaning you won’t pay the balance in full each month, then select a card with a low interest rate. That way you’ll save on interest. For transferring balances, select a credit card with a low balance transfer fee and a low balance transfer interest rate. If you plan to book flights on your credit card, look for one that has frequent flier miles. You’ll have an easier time shopping for a credit card when you know exactly what you’re looking for.

Know the grace period.

The grace period on a credit card is the amount of time you have to pay a balance in full to avoid a finance charge. Grace periods nearly always apply only when you begin the billing cycle with a $0 balance. Longer grace periods are better if you plan to pay your balance off each month because you get more time to pay your balance before a finance charge is assessed.

You may not get a grace period on purchases if you already had a balance at the beginning of the billing cycle. Not only that, certain types of balances, like balance transfers and cash advances don’t have grace periods. Interest begins accruing on those balances immediately.

Check the interest rate.

The interest rate is one of the primary factors you should consider when you pick a credit card, especially if you don’t plan to pay off your balance every month. Lower interest rates mean you pay lower finances charges – the fee charged whenever you carry a balance beyond the grace period. Lower interest rates are typically given to applicants that have better credit scores. If you don’t have a good credit score, you may not qualify for a low interest rate.

Credit cards can have several interest rates – one for purchases, one for balance transfers, and one for cash advances. Interest rates for balance transfers and cash advances are usually higher, unless you’ve signed up for a promotional offer. Check for the lowest interest rates on the types of balances you plan to transfer.

Check the credit limit.

The credit limit is the maximum amount you can charge on your credit card without receiving a penalty. Some credit card companies have eliminated over-the-limit charges that are imposed whenever you exceed your credit limit. Exceeding your credit limit can still result in a higher interest rate since you’ve defaulted on the terms of your credit card agreement. If you need to make expensive purchases, look for a credit card that has a high credit limit. Remember that if your balance exceeds 10% of your credit limit, your credit score could be affected.

Pay close attention to the fees.

Most credit cards have fees. It’s one of the ways banks make money from credit cards. Ideally, you want to completely avoid credit card fees unless the credit card has some other benefit that makes the fee worth it. For example, some rewards credit cards have an annual fee. If you can accumulate more rewards than your annual fee, then you’ve got a good deal. Otherwise, you’re paying for something you could have been getting for cheaper, or maybe even free.

Read the credit card disclosure.

Credit card companies are required to give you certain information about their credit cards whenever they send a credit card offer or application for the credit card. These credit card disclosures contain most of the information you need to pick the best credit card. This includes:

• the annual percentage rate for all types of balances
• the penalty rate and the instances in which the penalty rate applies
• any variable interest rate information, along with the associated index rate
• the grace period
• the finance charge calculation method
• the annual fee, if any
• the minimum finance charge
• fees, like cash advance fees, balance transfer fees, late payment fees, and over-the-limit fees

Choose Wisely

Rather than pick the first credit card you see, compare several credit cards from different issuers to be sure you’re getting the best deal. Finally, don’t apply for too many credit cards within a short period of time. You’ll hurt your credit score with multiple credit card inquiries and may even be denied for credit cards because of the applications.

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