Credit card debt rose from $6,040 in 2018 to $6,194 in November of 2019, according to an article from NASDAQ. Based on the average interest rate of 16.88%, a person pays around $1,045.55 annually just in interest fees — and that’s not even counting late fees and other charges. While spending more than you’re able to pay back is one major pitfall to avoid with a credit card, getting hit with common — and sometimes avoidable — credit card fees can also threaten your ability to use these cards to your advantage.
To help you save money and use your credit cards effectively, here are the most common credit card fees and how to avoid them.
1. Interest charges on purchases
One of the most common and avoidable credit card fees is the interest charged on purchases. Creditors charge a fee when you carry over a balance from month to month. The fee is determined by the annual percentage rate (APR) and your average daily balance.
In most cases, these charges are completely avoidable if you pay off your credit card balance in full each month. If it’s difficult to pay off your balance in full each month, look for low-interest credit cards to minimize your costs. You should also dive into your spending and see where you can cut back so you’re not carrying over a balance each month.
2. Annual fees
Some creditors charge you a fee for owning their credit card — this is called an annual fee. In many cases, creditors justify annual fees with rewards or benefits that they believe are worth the cost.
For the most part, annual fees are avoidable. Yes, there are credit cards with annual fees that offer pretty great perks in terms of reward points, cash back, travel miles and the like, but if you’re not a big spender — or you’re really trying not to be — there are plenty of great rewards cards with no annual fee.
The one situation where an annual fee may not be avoidable is when you have a low or no credit score. In this case, the creditor may require a fee to lessen the risk of default. The fee may be worth it to you if you’re able to build your credit responsibly.
3. Balance transfer fees
Creditors charge balance transfer fees when you move an outstanding balance from one credit card to another. The fee is usually between 3% to 5% of your balance.
Transferring balances is a common strategy when trying to get out of debt. Cardholders will ideally transfer from a high-interest card to a low-interest card to pay off their debt much faster.
Because you can typically save hundreds, if not thousands, of dollars in interest with a balance transfer, the fee may be worth the cost. But transferring balances alone is not a suitable get-out-of-debt plan. If you’re moving balances from card to card as a long-term strategy, you’re not actually paying off debt — and the fee will just add to what you already owe.
- Related: Best Balance Transfer Credit Cards
4. Late Payment Fees
You may receive a late payment fee if you pay the minimum payment after the due date. These fees can be upwards of $28 to $39, depending on how often you miss the due date.
Although there are credit cards that don’t charge late fees, the best way to avoid a late payment fee is to make sure you have the resources and processes in place to pay on time.
Following a personal spending plan will ensure you always know what to pay — and that you have the money to pay it. Enrolling in auto-pay or simply adding due dates to your calendar can also help you stay on top of your bills.
5. Over-the-limit fee
An over-the-limit fee is charged when you go over your available credit limit. These fees typically range from $25 to $35, depending on how often you go over your credit limit.
This fee is technically avoidable. Thanks to the CARD Act of 2009, cardholders must opt-in to be charged this fee. If you choose not to opt-in to the fee, you will not be charged the fee. Instead, a creditor can simply decline any purchases that send you above your credit limit.
Similar to the late payment fee, the best way to avoid the over-the-limit fee is to know and maintain healthy spending habits.
6. Returned payment fee
Writing a check or submitting an online payment that is returned due to insufficient funds results in a returned payment fee. You can avoid returned payment fees by making sure your money is in the account by the time the check or online payment processes.
Processing delays can make it tricky to keep track of paid bills that have yet to be taken out of your account. Budgeting is a great practice for keeping track of the money that should be counted as “gone,” even though the creditor has yet to process the payment.
7. Cash advance fees
Many credit cards allow you to withdraw cash from your credit limit — this is a cash advance. As convenient as this option sounds, it comes with a fee. Creditors will charge a cash advance fee that is a percent of the amount you withdrew. The most common fee is 5%.
However, the costs of credit card cash advances go beyond this fee. You’re also charged interest on the cash advance, and it’s typically higher than the interest charged on purchases. Unlike purchase interest, cash advance interest accrues immediately — you can’t avoid it by paying your balance in full each month. On top of all of that, you may get hit with ATM fees.
Credit cards can be convenient in emergencies, but they’re not a healthy emergency plan. The best way to avoid cash advance fees is to have an emergency fund to fall back on. Because emergency costs are inevitable, try to prioritize your spending so you can save a minimum of $1,000 to start.
8. Foreign transaction fees
Foreign transaction fees — typically around 1% to 3% — are charged when you make a purchase outside of the U.S. Many cards, especially travel rewards cards, have no foreign transaction fees. So it’s becoming increasingly easier to avoid this fee if you’re a heavy international traveler.
The bottom line
Credit card fees can unknowingly negate many of the benefits of using credit cards — like building credit. For effective credit card use, make sure you know how your creditor handles each of these fees so that you can minimize their impact on your finances.