How Much Does a Credit Card Cost, Really?

Credit cards offer convenience and purchasing power, but they come with various costs. Understanding these charges is important for managing personal finances and avoiding unnecessary expenses.

Interest Charges

Interest is a primary cost of using a credit card, especially when a balance is carried over from one billing cycle to the next. The Annual Percentage Rate (APR) represents the yearly cost of borrowing money. Credit cards often feature different types of APRs, such as a purchase APR for everyday spending, a cash advance APR for withdrawing cash, and a balance transfer APR for moving debt from one card to another. Cash advance APRs are typically higher than purchase APRs.

Most credit cards utilize a variable APR, meaning the rate can fluctuate based on an underlying index, such as the prime rate. Some cards may offer a fixed APR, which remains constant unless the issuer provides advance notice of a change. Introductory or promotional APRs offer a lower rate for a limited period, often six months or more, but the rate can increase significantly once the promotional period ends.

Interest accrues daily on outstanding balances, calculated using methods like the average daily balance. This method considers the balance each day of the billing period, adding new charges and subtracting payments to determine an average. The average daily balance is then multiplied by the daily periodic rate (APR divided by 365) and the number of days in the billing cycle to arrive at the interest charge.

A grace period allows cardholders to avoid interest on new purchases if the statement balance is paid in full by the due date. This period typically ranges from 21 to 25 days from the end of the billing cycle. To maintain the grace period, the entire outstanding balance must be paid off each month. However, cash advances generally do not have a grace period.

Annual and Periodic Fees

Some credit cards charge an annual fee, typically billed once a year. Annual fees can range from around $50 to over $500.

Issuers charge annual fees to offset the costs of premium benefits, such as rewards programs, travel perks like airport lounge access, or exclusive event access. While many cards do not have annual fees, those that do often offer enhanced rewards or features that may provide value exceeding the fee for frequent users. Some issuers may waive the first year’s annual fee as an incentive for new applicants.

Transaction-Based Fees

Transaction-based fees are incurred for specific uses of the credit card. A cash advance fee is charged when withdrawing cash from an ATM or bank using a credit card. This fee is commonly 3% to 5% of the advanced amount, with a minimum charge typically ranging from $5 to $10.

Balance transfer fees apply when moving debt from one credit card to another. These fees are generally a percentage of the transferred amount, often between 3% and 5%, with a minimum fee typically from $5 to $10. Foreign transaction fees are charged for purchases made in a foreign currency or processed by a foreign bank, usually amounting to 2% to 3% of the transaction value. Other less common transaction fees might include expedited payment fees if a cardholder requests a rush payment processed by a live representative.

Penalty and Other Fees

Penalty fees are incurred due to actions such as late payments or exceeding credit limits. A late payment fee is charged when a payment is not made by the due date. These fees are generally capped by law.

Over-limit fees were previously charged when a cardholder’s balance exceeded their credit limit. However, the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 significantly restricted these fees. Cardholders must now opt-in to allow transactions that exceed their credit limit to be approved, and if they do, the fee cannot be higher than the amount by which the limit was exceeded. As a result, over-limit fees have become rare.

Returned payment fees are assessed when a payment attempt is unsuccessful due to insufficient funds or other issues. Additionally, a penalty APR may be applied if a cardholder makes late payments, has a returned payment, or violates other terms of the card agreement. This elevated interest rate can be significantly higher than the standard purchase APR and can apply to both existing balances and new purchases.