What are the hidden costs with credit cards?

Credit cards are relatively easy to obtain and despite the legal and binding agreement, many consumers do not read or cannot understand the tiny fine print legalese that accompanies most credit card applications.

Whether the costs are hidden or clearly spelled out, you should be aware of the major ones imposed by most credit card companies. These include annual use fees, interest rates, and various penalties.

If you do not know what costs are associated with your card, call your bank and request the information so that you are making informed decisions with your credit card use and then use our free credit card finder to find and compare the top card offers online.

Fees Associated with Credit Cards

Fees vary with every credit card company and are usually found easily on the credit card application. Some banks charge an annual fee, also called a membership fee, while others do not charge one at all. Annual fees vary and can be as low as $30 and as high as $300, but the average tends to be around $30.

The hidden cost to be aware of with credit card fees is the one where there is no annual fee provided that you make a certain number of purchases or a set dollar amount during the year. You may not realize you have to use your card in order to waive the membership fee and then be surprised when the charge shows up on your credit card statement. Confirm that your card does not have this restriction or, if it does, be aware of the requirements. You may only need to use your card one time or make purchases totaling $100 in order to qualify.

If you are charged an annual fee, you can always call the credit card company and request to have the fee credited as a courtesy to you. There are no guarantees, but depending on your history with the bank, you may find this fee is easily reversed in your favor.

Rates Associated with Credit Cards

Rates are usually the hardest part of a credit card to understand. While the rates are disclosed upfront and usually in large print (thanks to the Fair Credit and Charge Card Disclosure Act of 1988), the calculations of the rates are usually defined in the small print.

Most credit cards offer an APR (Annual Percentage Rate) that is either a variable rate or a fixed rate. Variable rates are based on a set rate that is added to the current prime rate, which means your interest rate can fluctuate daily. This is good for you if the prime rate decreases and likewise is unfortunate for you if the prime rate increases. Unlike variable rates, fixed rates remain the same day to day with the exception that usually these credit cards reserve the right to change your rate at any time provided they give you a minimum 2 week notice.

With either rate, finance charges are usually calculated on a compounding basis, which means you pay interest on your interest and any other fees or penalties you incur. Additionally, more than half of the credit card companies charge interest from the time the purchase was made, which means you could be paying interest on a balance that doesn’t even exist. For example, if you make a purchase of $1200 and pay off everything but the $200 before your billing cycle due date, you will still be charged interest for the entire $1,200 until that remaining $200 debt is paid in full.

One of the biggest hidden costs with credit cards is the Default Interest Rate, which is a much higher interest rate than you typically carry. There are several things a cardholder can do to trigger the default interest rate, such as successive late payments or going over your credit limit, automatically triggering the default interest rate on your credit card. This can be very significant, potentially more than doubling your interest rate.

Universal Default Rate, by the same token, is the option for other credit card holders to activate their default interest rate on your account when any of your other cards are triggered. So let’s say, for example, you were late with two payments on Credit Card A, allowing Credit Card A to activate your Default Interest Rate of 19.97% instead of the 12.97% you had.

Universal Default Rate now allows all of your credit cards to enable their Default Interest Rates as well, which means you could potentially be billed at the high Default Interest Rate on all of your credit cards even though you were only late on the one account. To avoid this from happening, be sure you know the rules for all of your credit cards and avoid triggering the Default Interest Rate.

Penalties Associated with Credit Cards

Every credit card has its own set of penalties that it can assess to your account. The common penalties are for making payments past your due date and for charging more than your credit limit allows. Late Fees have tripled in the last ten years and can average between $35 and $40. Over the limit fees can be charged if you exceed your credit limit and average around $39 for every month that you continue to have a balance over your limit.

Anytime you are approaching your credit limit you need to be careful because even if you don’t make a charge that pushes you over the limit, if you interest fees are high enough to beyond the maximum then you will be charged for going over the limit.

While the credit card companies are required to disclose financial computations and penalty assessments to you, they are not always done so in a way that can be easily understood. If you can’t understand the terms and conditions of your credit card agreement, call the credit card company for clarification to be sure you are fully aware of the impact that using your credit card will have. As long as you have an idea of the different types of costs involved with a credit card and you make certain you understand them, you should not be surprised by any hidden credit card costs.

Find a Low Cost Credit Card

Select a card whose rates you understand and are comfortable with. To determine if you should choose a card with a membership fee or if you want a fixed rate over a variable rate, compare different cards online now using our free credit card finder on our home page!