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Understanding credit card fee

Credit cards are convenient. Find out more about these cards and it's fees.

04 August 2022Lloyd Smith 6 min read
Understanding credit card fee

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Credit cards are now a popular means of managing daily credit transactions. By extending a line of credit, they make cashless transactions convenient, but all of this doesn't come for free.

There are certain fees attached to credit cards which you need to pay, apart from your monthly credit expenditure.

In this article, we take a look at different types of credit card fees and how they can affect your finances.

Credit card fees are charges you pay for owning and using a credit card. These include additional fees aside from credit card purchase fees that are charged by credit card providers for lending you money and for covering the benefits offered on the card.

Credit cards should not have hidden fees, but sometimes they do. In order to market themselves better, most credit card providers showcase the best benefits of credit cards in big, bold letters. But the drawbacks of credit cards are often hidden at the bottom of the marketing brochure in a very small font – making them easy for you to miss. Higher credit card fee can often be missed because they aren’t mentioned very clearly by lenders.

For instance, a credit card advertised as a ‘zero annual fee card,’ may have high interest rates, especially on delayed payments.

That is why, you should review the terms and conditions of the credit card, including all fees and repayment schedules to determine if you can manage them.

While card holders are obligated to pay credit card fee, there are also credit card processing fees that need to be paid by businesses that accept credit card payments. This fees is charged by processing networks and card providers.

Credit card processing fees include three types of fees in it: interchange fees, payment processor fees and assessment fees.

  • Credit card providers charge interchange fees
  • Payment processor charges payment processor fees and assessment fees. (Assessment fees are charged monthly on total transactions facilitated, while processor fees are charged per transaction)

Here are the different types of credit card service fee that you can expect to pay:

1 - Annual fees

A credit card annual fee is the yearly amount charged for the ownership of a credit card. It is charged when you are issued a credit card, and it is to be renewed every 12 months. Interest rate can be levied on the annual fee, if you don’t pay it on time.

Credit card issuers charge an annual fee to cover the cost of the credit card benefits they offer. Usually, the more attractive your credit card benefits and features, the higher the annual fee.

Some card issuers do not charge an annual fee on credit cards for the first year as an introductory offer, while others do not charge any annual fee at all on some cards. But with no annual fee credit cards, you can expect little or no benefit.

2 - Interest

Interest rate on credit cards is the rate charged on the amount borrowed against the card.

The interest rate in case of credit cards is charged yearly and also called the Annual Percentage Rate (APR).

In most cases, you are only charged interest on unpaid balance that you haven’t paid off by the end of your billing cycle.

The interest rate you get can depend on your credit card and the type of card you get. If you have a bad credit score, you may only be able to get a credit card with a high interest rate since lenders may consider you a liability.

Some credit card companies offer low or 0% APR for a fixed period as a promotional offer. If you take advantage of such an offer you will be charged low or no interest on your balance until the offer ends. After the promotional period, the interest will revert to the normal rate.

Credit cards with more features and perks can also attract higher interest rates. Moreover, a penalty APR may also be levied against you for payment delinquency or default. Credit cards for bad credit also have a comparatively higher interest rate since it's much easier to get approved for them even with a low credit score.

3 - Balance transfer fees

A balance transfer fee is a one-off fee charged by credit card providers when you transfer unpaid debt from an old credit card to a new balance transfer card. In most cases, people prefer to transfer balance from multiple high-interest cards to a single balance transfer credit card with a low or zero APR. The goal of the transfer is to consolidate old debts and pay them off old debts in a more cost-effective and timely manner.

A balance transfer fee is either charged as a percentage of the amount transferred or a flat fee, which can depend on the new credit card issuer. The cost is added to your credit card balance.

4 - Foreign transaction fees

Foreign transaction fees is a type of credit card fee that is charged on payments you make in foreign currencies. It is the cost of converting the foreign currency into your local currency.

You may incur foreign transaction fees if you shop online in a different currency or use your credit card overseas. You can also be charged if you withdraw cash from an ATM overseas. Foreign transaction fees may be 2-3 percent of the total transaction.

Though not all credit cards charge foreign transaction fees. You can switch to such cards if you make a lot of foreign transactions.

5 - Cash advance fees

A cash advance fee is a service charge levied when you take out cash through your credit card. While not all credit cards allow cash advances, some do allow you to use your credit card like a debit card and take out cash from an ATM in case of an emergency. There is usually a limit to the amount of cash you can withdraw. A cash advance fee can either be a flat fee or a percentage of the amount withdrawn

The fee can be deducted from the cash advance itself or added to your credit card bill. Aside from the cash advance fee, you can still be charged an interest on the cash advance you take.

6 - Late payment fees

A late payment fee is charged as a penalty for not making a minimum payment at the end of the billing cycle. It may be a flat fee or a percentage of the unpaid amount. Some card issuers charge a lower late fee for first-time defaulters and higher when you miss multiple payments.

A late payment fee will reflect on your next month's credit card statement and be added to your credit card balance. It is better to avoid late payments because they can attract interest and reflect on your credit report too.

7 - Over-limit fees

Over the limit a fee is charged when you make a purchase over the credit card limit. Instead of declining a transaction exceeding your credit limit, you may be prompted to opt-in to an over-limit transaction and agree to be charged for it. You are only allowed to go over the limit once in every billing cycle.

8 - Reward program fees

Reward program fees are charged on reward cards and the fee depends on the time and the quantity of rewards included in the credit card. Reward cards offer benefits like cash back and travel points based on your spending. However, some benefits may attract extra fees. As such, you should carefully review the terms and conditions of your reward card to understand the fees associated with the card.

9 - Credit card surcharges

Business owners can charge credit card surcharges to cover the cost they incurred for processing the transaction.

To recover these costs, businesses either incorporate the cost into the price of their goods and services, or charge people with a credit card transaction fees.

Based on the Reserve Bank of Australia (RBA) standard, businesses are banned from charging excessive payment surcharges that are higher than the actual cost of processing the transaction.

10 - Extra cardholder fees

Extra cardholder fees are charged for authorising additional cardholders to use your card.

The cost of a credit card varies based on your card provider, the type of credit card you have, and how you use your card. Some credit cards charge annual fees, and you can also incur additional costs for certain transactions. Credit card fees in Australia can accumulate and add on to your unpaid balance.

Credit card fee depends a lot on the credit card you choose. If you pick a card with a lot of different overhead fees, you may end up paying a surplus amount every month just to cover all these different fees.

That is why it's essential to pick a credit card that fits your needs and your budget. Take a look at our in-depth guide on how to choose the right credit card.

You can check your credit score to see which credit card offers you are eligible for before applying for one.

ClearScore allows you to get free credit reports and check credit score instantly. Take a look.

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Written by Lloyd Smith

General Manager AU

Lloyd spreads the word about how awesome ClearScore is.