Credit cards can be a convenient tool for managing finances, earning rewards, and building credit. However, many cardholders unknowingly incur fees that add up over time. By understanding how credit card fees work and strategically managing your spending, you can avoid unnecessary costs and make your credit card work for you.
In this guide, we’ll explore common credit card fees, how to avoid them, and why chasing points can sometimes do more harm than good.
Common Credit Card Fees and How to Avoid Them
- Late Payment Fees and Penalties
One of the most common credit card fees is the late payment fee, which can range from $25 to $40. In addition to the fee, your interest rate may increase, potentially making it harder to pay off your balance.
How to Avoid It:
- Autopay:Set up automatic payments to ensure you never miss a payment deadline.
- Manual Reminders:If you prefer not to use autopay, set monthly calendar reminders to help you stay on track with payment dates.
- Interest Fees
Interest fees occur when you carry a balance on your credit card from month to month. These fees can quickly add up, making it difficult to pay down your debt.
How to Avoid It:
- Pay in Full:Always aim to pay your full balance by the due date to avoid interest charges.
- Use Your Card Like a Debit Card:Treat your credit card as you would a debit card—only spend money you can afford to pay off immediately. This will prevent interest charges and help you stay within your budget.
- Annual Fees
Many credit cards charge an annual fee, which can range from $30 to $500, depending on the card’s benefits. While some cards offer valuable rewards or perks, others may charge an annual fee without providing significant value.
How to Avoid It:
- Choose No-Annual-Fee Cards:If you want to avoid paying an annual fee, compare credit cards that do not charge this fee. Websites like Bankrate allow you to easily compare the pricing and features of various cards to find one that fits your needs.
- Over-the-Limit Fees
If you exceed your credit limit, some credit cards will charge an over-the-limit fee. Many cardholders don’t realize they’ve opted into this feature, which can result in unexpected charges.
How to Avoid It:
- Opt-Out:Choose not to opt into over-the-limit protection when applying for a card.
- Monitor Spending:Regularly track your spending and make sure you stay within your credit limit to avoid this fee.
- Balance Transfer Fees
If you transfer a balance from one credit card to another, you may incur a balance transfer fee, typically 3–5% of the transferred amount. While transferring a balance to a card with a lower interest rate can save you money in the long run, the balance transfer fee can add up, especially on larger balances.
How to Avoid It:
- Know the Terms:When transferring a balance, be sure to understand the promotional interest rate and when it will expire. Plan to pay off the balance before the regular interest rate kicks in, or consider doing another balance transfer to avoid high fees.
- Use Existing Cards:If you don’t want to open a new card, check if you can transfer the balance to an existing card with available credit. This avoids reducing your credit score from hard inquiries and preserves your credit age.
Chasing Points: The Pros and Cons
A major draw for many credit card users is the opportunity to earn points or rewards on everyday purchases. However, some people get caught up in the chase for points and end up paying more in interest than they earn in rewards. Let’s take a closer look at why this happens and how you can avoid falling into this trap.
Why Do Credit Card Companies Offer Points?
Credit card companies design reward programs to incentivize spending. By offering points, cashback, or travel rewards, they encourage consumers to spend more, which in turn increases the amount of interest and fees the company collects. These rewards programs are profitable for the companies because they rely on cardholders carrying balances and paying interest, which offsets the cost of the rewards.
The Risks of Chasing Points
While earning rewards can be enticing, it’s important to remember that paying interest on credit card balances can quickly negate any benefits from rewards points. Here’s why chasing points can sometimes work against you:
- Paying Interest on High Balances:If you’re carrying a balance from month to month, the interest charges can outweigh any rewards you earn. For example, if you earn 1% cashback on your purchases but are paying 20% interest, you’re essentially losing money.
- Spending Beyond Your Means:The desire to earn more points may cause some individuals to overspend, leading to unnecessary debt.
- Annual Fees:Some rewards cards come with high annual fees, which can also eat into your potential rewards.
How to Maximize Points Without Falling Into Debt
- Pay in Full:Always aim to pay off your balance in full to avoid paying interest on your purchases.
- Use Cards Strategically:Choose a rewards card that offers the most value for your spending habits, but only use it for purchases you can afford to pay off immediately.
- Limit High-Interest Cards:Be cautious of credit cards that charge high interest rates while offering rewards, as the interest charges can quickly exceed the benefits of the points.
Conclusion
Credit card fees are easy to avoid if you stay informed and adopt smart spending habits. By setting up autopay, paying off balances in full, and choosing the right cards, you can avoid late fees, interest charges, and other common expenses.
Chasing points can be a rewarding experience, but it’s crucial to do so in a way that doesn’t cost you more in interest or fees. Use credit cards strategically to earn rewards without falling into debt. With the right approach, you can take full advantage of credit cards’ benefits while maintaining a healthy financial balance.
Sources:
- Cash, Kevin. “How to Avoid Paying Credit Card Fees.” S. News, 2018.
- “Avoiding Credit Card Fees: What to Know.” Bankrate, 2023.
- “The Risks and Rewards of Chasing Points.” Investopedia, 2022.
