Credit card companies are in business for one reason – to make money. Sure, they will tell you they offer you a chance to enjoy life now, or have an emergency line of credit, but rest assured – the thing they are more concerned about is whether or not you make your minimum payment on time.
Don’t get me wrong, I have nothing against credit cards, and I think there are many reasons to use credit cards. In fact, many people actually make money by using rewards credit cards. But for a credit card company to pay me that money, it has to come from somewhere. That money comes from the killer fees they charge.
Credit card companies are always creating new and innovative methods of extracting fees from their customers. I haven’t seen raw numbers, but I would venture to say credit card companies make the majority of their money from miscellaneous fees, penalties, and other charges they assess their customers. I’m sure the credit card companies don’t want to make these numbers readily available if they are not already.
How to Avoid Credit Card Fees
Application and Annual Fees: You want me to pay you for the honor of applying for your card, then you want me to pay you an annual fee for the privilege of using said card? No thanks! Not when I can use a rewards card and have the credit card company pay me! Avoid these fees by only applying for cards without annual fees or application fees, or ask for the fee to be waived.
Sky High Interest Rates: There is no federal law to limit interest rate charges; those laws are covered at the state level. In fact, many credit card companies incorporate in Delaware or other states that have a high interest rate ceiling or none at all. This allows them to charge such high rates! Avoid these fees by paying your bill in full every month or opening a 0% interest credit card.
Double-Cycle Billing: Some credit card companies have found a way to charge more interest to their customers and force them to pay interest for debt they have already paid! Double-cycle billing, also called two-cycle billing, charges interest for the average daily balance for two cycles: the current cycle, and the previous cycle. With this practice, credit card companies can charge their customers for debt they have already paid. Avoid these outrageous fees by paying your bill in full every month and shopping for a card provider who doesn’t charge these fees. No one should have to pay interest twice.
Universal Default Interest Rate Ladder: The Universal Default Interest Rate Ladder raises your interest rates to a ‘default’ level when there is the perception that lending money to you takes on a higher amount of risk for the credit card companies. Credit card companies regularly screen their current customers’ credit reports for universal default triggers which may include exceeding your credit limit on another card, a single late payment any debt, a decline in your credit score, a high debt utilization ratio, adding additional lines of credit such as a home mortgage or auto loan, or even applying for more credit, whether it is approved or not! The universal default rate can cause your interest rates and payments to skyrocket! The worst part is, you won’t even know it was applied until you get your next bill. Avoid these fees by paying all your bills on time, maintaining a good debt utilization ratio, and not exceeding your credit limits.
Late Fees: According to Consumer Action, a California consumer group, late fees averaged $28 per month in 2006. The highest was $39. That is a lot of money to add to a credit card bill – especially because the person receiving it likely can’t afford it in the first place. Also, pay attention to your due date. Credit card companies have been known to change them without notifying their cardholders, resulting in late fees and higher interest rates. Avoid these fees by paying your monthly bill on time.
Cash Advance Fees: You know those little checks your credit card company sends you in the mail every month? They aren’t the same as swiping your card. You have to pay a 1-3% fee each time you use these checks, and pay the interest if you don’t pay them off in full! You can also get a cash advance at an ATM machine. Avoid these fees by not using the checks or a cash advance from an ATM. Shred the checks as soon as they arrive, or better yet, have the credit card company stop sending them to you!
Balance Transfer Fees: Sometimes you can transfer your existing credit card debt to a card with a lower APR such as a 0% balance transfer offer. This can save you a lot of money in interest payments, but it may cost you 1-3% of the balance transfer or more. Some companies cap the charge, and others have a minimum charge. Avoid these fees by asking them to waive the fees, or using a card that doesn’t charge balance transfer fees.
Over the Limit Fees: Oops! You went over your limit! That’s too bad, because not only did that cost you about $20-40 dollars in over the limit fees, but it may have triggered the universal default interest rate ladder – which may affect the interest rates you pay on other credit cards. Avoid these fees by keeping track of your credit limits and utilization and don’t exceed your balance.
Rate Jacking: Apparently, some credit card companies add some small print to the agreement you sign that gives them the ability to raise rates, “just because.” They sometimes give you the option to opt out, but this requires action on your part.
Avoid credit card fees
Most of these fees can be avoided by paying your balance in full every month. If your are working your way out of debt, then the best way to handle these killer credit card fees is to read and understand the fine print in your cardholder agreement and act accordingly. If there is something in the agreement you don’t like or understand, don’t apply for the card.
If you already have the card, you have to be diligent to make sure your actions don’t cause these extra fees or penalties. You can also try contacting your credit card company to try and have some fees reduced or the terms of your contract changed. This may work once or twice, but I wouldn’t rely on this as a long term solution.