Common Credit Card Costs & Fees

credit card calculatorSpending money that doesn’t feel like yours may be fun, but it certainly isn’t free. The costs and fees associated with credit cards is something that’s important to fully understand prior to using your card for the very first time.

Otherwise, you could be surprised by a number of huge costs and fees you never anticipated.

Basic Interest Rates and APR Fees

At the most basic level interest is the fee paid for the privilege to borrow money. The financial firms lend out money and they charge you for allowing you to do so. The rate charged can vary for each consumer based on how confident the firm is that you will pay them back, and what your credit score is.

In the United States the average interest rate on a credit card is typically between 15 and 20%. While this may be tough to call ‘good’ or ‘bad’ to many consumers, it is important to put this in perspective.

When thinking of the 15-20% interest rate on a credit card, it’s important to remember that this is expressed as Annual Percentage Rate (APR). So at 20%, you would divide this by 12 to roughly get the rate that will be applied to your balance monthly (1.67% in this case).

This rate can be charged as a “fixed APR” as well as a “variable APR”.

Fixed Rates

A fixed rate is what it sounds like, a rate that is fixed during the charge period.

Variable Rates

Variable on the other hand is tied to some type of published rate, often the US Treasury Bill Rate or Prime Rate tracked here. The rate will be expressed “prime rate + your rate”. This will be updated at set increments, even daily. Although variable rate cards often offer lower introductory rates, they can cause trouble for consumers down the road if the rate resets to a much higher percentage.

Calculation Methods

The calculation using the APR, fixed or variable, can change from company to company and card to card:

Average Daily Balance

The credit card company averages your daily balance throughout the month. Specifically, they look at your balance each day, and divide that by the number of days in the month. That amount, multiplied by approximately 1/12 your APR would equal the finance charges for the month.

Daily Balance

Credit card companies calculate the finance charge based on your outstanding balance each day. This daily amount is multiplied by approximately 1/365th of the APR to determine the daily finance charge.

Two-Cycle Balance

This is one to look out for because it can be the most expensive. Here, the credit card company charges interest on debt already paid. They will take the average daily balance over the past two billing cycles and charge interest on it. The bad thing here is that extra payments to reduce your balance won’t affect the previous balance, so you’ll have to pay a higher rate, even after reducing your balance.

Previous Balance

The credit card company issues a statement showing the balance at the beginning and the end of the month, and charges interest on the beginning.

Other Typical Fees

Finance Charge – usually charged monthly based on the APR, balance and grace period.

Cash Advance – charged each time you take a cash advance and is usually 3% or more of the amount withdrawn.

Balance Transfer – fee that is charged each time you transfer money from one credit card to another. You only pay the fee to the card issuer you’re transferring the balance to.

Minimum Payment – the lowest amount of money you’re required to pay by a certain date to avoid defaulting on the agreement and receiving any late fee penalties for doing so. It’s usually a minimum percentage or dollar amount.

Late Payment – fee applied whenever you don’t pay your minimum payment due by the due date.

Over Limit – some companies will allow you to charge more than your available credit limit; however, they will also charge you a hefty over the limit fee.
Next we go over important things to consider when choosing a credit card….

Posted on January 5, 2012 by in Credit Cards

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