Why Do Credit Card Companies Charge Fees?

Credit card issuers will charge certain fees based on the type of card you have or how you use it. Some fees, such as late payment fees, are designed to encourage you to pay on-time. Annual fees charged on some credit cards are designed to cover additional benefits that come with your credit card, such as rewards programs. Other fees, such as cash advance fees, cover the cost of certain types of transactions.

Some of the ways card companies charge fees will change due to the Credit Card Accountability Responsibility and Disclosure (CARD) Act. Under the new law, for example, you will be given 45-days advance notice before a significant account change, such as a rate and/or fee increase.

Some common fees include:

  • Annual Fee – This is a yearly fee for use of certain types of credit cards. Many of the cards that have an annual fee offer benefits, such as cash rewards, airline miles or points towards merchandise.
  • Balance Transfer Fee – This is a fee applied when you pay off the balance on one credit card by using another credit card. Essentially, you are transferring the balance from one card to another. The fee is typically a percentage of the balance you are transferring.
  • Cash Advance Fee – This is a fee charged when you use your card to get cash, either from a bank or an ATM, or by writing a convenience check (a check that you would use just as any other check, except instead of having the money taken out of your bank account, it is debited to your credit card account).
  • Late Fee – This is a fee imposed when you do not pay at least the minimum payment by the specified due date. Please note that after the CARD Act rules go into effect in early 2010, payments received by card companies by 5 p.m. on the due date will be considered on time.
  • Overlimit Fee – This is a fee charged for exceeding your credit limit, which is the maximum amount that you can charge on your credit card. Please note that when the new CARD Act rules go into effect, issuers cannot charge you an overlimit fee unless you have specifically agreed to it.Discover is one of two major credit card companies that has decided to eliminate overlimit fees altogether.
How to Avoid Fees

The best way to avoid certain credit card fees is to adhere to the terms and conditions set forth in the yearly cardmember agreement. Here are a few simple rules to follow:

  • Pay on time – One of the most important steps in building and maintaining a solid credit history is to pay all of your bills on time each month. By paying on time, you’re showing the lender or creditor that you’ve got enough cash flow to cover your expenses. If you pay late and the creditor reports your late payment to the credit bureaus, it may damage your credit history and lower your credit score.
  • Stay within your credit limit – If you want to boost your credit history and credit score, keep your total monthly charges well within your credit limit. Why? Your credit score may be affected if your balance is above that limit because it signals to creditors that you may be having financial difficulties and thus are a riskier borrower.

Here’s another good rule of thumb: when establishing credit, try to generally pay off your charges in full at the end of the month, or at least pay more than the minimum payment. Paying off your balance sooner shows the card company that you’re fiscally responsible. You’re using your credit card as it was intended: as a short-term loan.

Not all cards are alike when it comes to fees, so be sure to carefully review the terms of the card before you decide to apply. Call your credit card company’s toll-free number if you have any questions.

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