Credit Card Fees Can Add Up. How Much Are You Being Charged?
Whether you're a cardholder or a small business owner, credit card fees are almost inevitable.
Contributing Writer at Tally
March 17, 2021
Ever opened the terms and conditions for your credit cards and reviewed the fees? They may feel overwhelming and it can seem like credit card companies nickel and dime you for everything. But credit card companies are like any other business that needs to make a profit, and fees are how they make their money.
The average American household pays $577 each year in fees, including late fees, overdraft fees, penalty fees, and others. Late fees alone cost the average household $132 annually.
Not only are there consumer-facing credit card fees, but credit card issuers and the credit card processing companies that handle the payments also charge businesses for the right to accept plastic.
How much are credit card fees? We'll highlight the key consumer-facing and business-facing credit card fees so you can get a feel for how they work and what they might cost you.
Customer-Facing Credit Card Fees
Customer-facing credit card fees are those that credit card issuers periodically apply to your account. There is little you can do to prevent some credit card fees, but you can limit or eliminate others through careful credit card use.
Credit card interest is the king of credit card fees. If you maintain a credit card balance from one statement period to the next, your credit card company will charge you one month's worth of your annual percentage rate (APR).
For example, if you have a $1,000 balance and a 20% APR, your yearly interest would be $200. Your credit card company would divide this by 12 to get a monthly interest charge of $16.67.
Many credit cards entice shoppers by offering low minimum monthly payments. These minimum payments always include the interest accrued for the month plus a small portion of the principal balance. Because of this, interest eats up a lot of your monthly payment so you make only tiny impacts on the principal balance. This is what keeps the credit card debt cycle going.
However, if you pay your credit card balance in full every month by the payment due date, you can avoid all interest charges.
If you find yourself in the minimum monthly payment debt cycle, Tally can help manage your credit card payments and get you out of debt quicker.
If you're late on a credit card payment and don’t bring the account current within 60 days of when it was due, your credit card company may charge a penalty interest rate. This is an inflated interest rate — usually 29.99% APR, but it varies by credit card — that your credit card company can apply to your entire balance.
There are some limitations to penalty APRs, though. When it comes to penalty APRs, your credit card company:
Can't apply it during your first year of having the card, except in certain circumstances.
Must give you a 45-day notice of the APR increase.
Must review your account at least every six months and remove the penalty APR if your payments are current.
If you're late on your monthly payment — even if it arrived at your credit card company just a minute after the deadline on the due date — you may incur a late fee.
Like the penalty APR, there are late fee limitations. On your first time being late, your credit card can charge you up to $28. However, if you're late again within the next six billing cycles, the credit card issuer can charge you up to $39.
Like many other fees, the late fee is an added charge on your account and accrues interest.
Some credit cards require you to pay an annual fee just to hold the card — even if you never plan to use it. In some cases, it's worthwhile to pay the annual fee. For example, if the annual fee is $100, and you will regularly use over $100 worth of the card’s perks, the fee is worth it.
Some credit card annual fees can be exorbitant, reaching $400 or more, so always check the credit card terms to verify what the fee is. If there is a fee, calculate the value of the perks you know you'll use each month. If these perk values exceed the amount of the annual fee, it's safe to proceed.
In some cases, the credit card company will waive the first annual fee to attract more customers. You may be able to call your credit card company to have additional annual fees waived.
Remember, the credit card company charges the annual fee directly to your credit card account, so it can incur interest charges like any other purchase.
Foreign Transaction Fee
If you travel outside of the U.S. regularly, you'll find you can often use your credit card in other countries. However, when you get your bill that month, you may notice each purchase has a slight markup on it. This is the foreign transaction fee.
These fees help cover the local currency’s conversion to U.S. dollars, and they are generally about 3% of the transaction amount. So, if you spend $10 in a country that uses currency other than the U.S. dollar, you may incur an extra 3-cent fee.
These fees are relatively easy to avoid by either paying cash or finding a card with no foreign transaction fees. You can determine the latter by reading the "Fees" section of your credit card's terms.
Balance Transfer Fee
Most major credit cards will allow you to transfer a balance from one credit card to another, In some cases, they may even offer low or 0% APR for a fixed period — typically 8-12 months.
While this can be a helpful service, especially when trying to pay off debt, credit card companies don't offer it for free. There is usually a balance transfer fee of 3% to 5% of the amount transferred to the card, often with a $5 to $10 minimum charge, whichever is higher. So, if you transfer $1,000 from one credit card to another, you could incur a $30 to $50 balance transfer fee.
If you have the option to transfer a high-interest credit card balance to a 0% interest balance transfer card it may cost less to pay the balance transfer fee than the interest charges you’d be paying without the 0% promotional term.
Cash Advance Fee
Need cash now? Using your credit card at an ATM to take out cash might be an option, but it typically comes with a significant cash advance fee and may also come with additional fees, such as an ATM fee.
The base cash advance fee is typically 3% to 5%, but there is often a minimum fee of $10. Your credit card issuer may also charge you a higher interest rate on this cash on top of the cash advance fee and, unlike interest on purchases, that interest might start accruing right away instead of after the grace period.
Some credit cards will allow you to exceed your credit limit, but they'll charge you up to $25 the first time you do so and up to $35 any subsequent months you're over the limit for the next six months. Like all other credit card fees, this shows as a charge on your credit card account, and you will pay interest on it.
Fortunately, the Credit Card Act of 2009 requires you to opt in to have the ability to go over the limit and incur a fee.
Returned Payment Fee
If you made your credit card payment via check, but the check bounced, the credit card company can charge you a returned payment fee of $25 to $40.
Again, this is charged to your credit card account and can accrue interest. Also, keep in mind that you may incur additional fees from your bank for overdrawing your bank account.
Credit Card Replacement Fee
If you misplace your credit card or it was stolen, immediately call your credit card issuer and cancel the card. A replacement card can be requested, usually at no charge unless you ask for rush delivery. If there is a fee for the replacement card, you might consider asking for the fee to be waived — negotiating with credit card companies is possible..
Credit Card Processing Fees
There is a whole assortment of behind-the-scenes credit card fees that don't impact you as the consumer. Instead, they impact retailers who accept credit cards.
These fees often make up a portion of the profits credit card issuers need to provide rewards credit cards and other perks.
The interchange fee, in a nutshell, covers the transaction fees a merchant's bank must pay the credit card issuer, like Chase, Bank of America or Wells Fargo, when a customer makes a debit card or credit card transaction. This single fee comprises roughly 300 individual fees to cover things like payment handling, fraud protection, risk absorption, chargebacks and other items.
The interchange fee is determined by several factors, including:
Credit card network: Also known as the card brand, including Mastercard, Visa, American Express or Discover.
Type of card: Debit or credit.
Processing method: Swiped or punched in manually without the
Merchant category code (MCC): The type of business you run, e.g., grocery store, department store, nonprofit or a host of others.
The interchange fee is variable and is usually expressed as a percentage plus a fixed amount, for instance 0.10% of the transaction amount plus 10 cents.
As a cardholder, you never have to worry about the interchange fee, since only retailers, their banks and credit card issuing banks deal with them.
Like the interchange fee, the assessment fee is another per-transaction fee, but this fee goes directly to the credit card network instead of the issuer. These fees are a fraction of a percentage and can vary by network, credit card type, transaction volume and other factors.
For example, Mastercard may charge a company 0.12% for transactions under $1,000, or 0.13% for transactions over $1,000, whereas Visa may charge a company 0.13% to run a credit card or 0.11% for a debit card, no matter the amount of the transaction.
Merchant Services Provider (MSP) Markup
Every company that accepts credit card payments needs a merchant account with a credit card processor. These payment processors, known as merchant services providers (MSPs), must make money too. They usually do so by marking up their services per transaction or by charging a fee.
Each credit card processing company has its own pricing model. For example, one company may charge 10 cents per transaction, whereas another may charge flat-rate pricing, like a $100 monthly flat fee.
A discount rate may sound like a good thing, but it's just a name and includes no discounts at all. The discount rate, sometimes called simply credit card processing fees, is actually the total of all the monthly fees a retailer's bank must pay for credit and debit card payment processing and putting the cash into the company's bank account.
While there may be other small fees mixed in, the bulk of the discount rate is the interchange fees plus the assessment fees and MSP markup.
How Much Are Credit Card Fees? Zero, if You're Careful
Being in the credit card business can be quite profitable, since earnings come from businesses and consumers. The sheer number of consumer credit card fees may be alarming. The long list includes:
Foreign transaction fees.
Balance transfer fees.
Cash advance fees.
Returned payment fees.
Credit card replacement fees.
Fortunately, you can usually avoid every single one of these fees by using your credit card carefully. Businesses, on the other hand, aren't so lucky. If they want to offer the convenience of processing credit cards, they've got to pay the associated fees.
Feeling confused and overwhelmed by credit card late fees? Find out how Tally can help you get those under control.