How Much Are You Paying in Credit Card Fees?

In the last few decades, remarkable expansion in the use of consumer credit has allowed individuals from every income bracket the opportunity to purchase goods and services that one would otherwise not have access to. Not only do individuals and families use credit cards for emergency purposes, but often these plastic cards are swiped to purchase groceries, movie tickets, ski lift passes, and many more items. One of the largest card issuers in the United States reported that for the latest fiscal year, they had $4.1 Billion in card net income, with $131 Billion in credit card loans as of December 31, 2014—and this is just ONE of many card issuers in the United States. There are substantial benefits to having access to credit, but it is important for you to understand what you are paying for that access.

The most common fee that individuals think of is the “interest” rate they pay on their card. What most people do not understand is how that interest is actually calculated. For example, do you know if your balance is compounded daily or monthly? Do you know whether interest is calculated on the average daily balance or adjusted balance? Fortunately, a detailed understanding of complicated formulas is not necessary for you to understand what you really need to know. Thanks to legislation like the Credit CARD Act of 2009 and others, a lot of important information is at your fingertips.

Credit card issuers are required to disclose a summary of important figures at the top of all promotional material. The box, where these figures are located, is often referred to as the Schumer Box. Inside this box you will find key numbers including the following:

  • Annual Percentage Rate: This is the yearly rate of interest on your credit card. Keep in mind that if you carry a balance from month to month, the effective rate of interest you actually pay is usually a couple of points higher.
  • Other APRs: A card issuer may have different percentage rates for different types of transactions, such as balance transfers, cash advances, and more. These other APRs will often be different than the standard APR for your card. Most importantly, if you are late on payments, a “Late Payment APR” may be significantly higher than the APR you normally pay.
  • Finance Charges: Some cards may have minimum fees you must pay every period for service fees and related charges. It is not hard to find cards that have very low, or no, finance charges.
  • Annual Fee: Depending on the issuer or benefits associated with your card, you may be responsible to pay an annual fee.
  • Late Payment Fee: If you are late on a payment, you may be required to pay an additional charge between $15-$50, or more, for being late. This also may trigger the Late Payment APR percentage described above.

Before you sign up for a new card, you should consider these numbers, what you plan to use the card for, and how these numbers might change in the future. You should always consider the difference between an introductory APR, and the ongoing APR. Just because you have an introductory APR of 0% for six months, does not actually mean the card will be cheaper in the long run.

For an extremely simplified example, let’s say you sign up for a card with an introductory APR of 0% for six months, and 23.99% after that (not unheard of). If you sign up for the card and carry a $1,000 balance month to month, you will pay approximately $268 in interest over the first 18 months. Alternatively, if you carry the same $1,000 balance on a card with a fixed APR of 10.99% (also not unheard of), you will save nearly $100 in interest expense over the same period. Factor in that most households have several thousand dollars in credit card debt, and the saving quickly grows.

The CARD Act went one step further to require card issuer to provide the number of months and total cost to you it would take to pay off the balance making only minimum payments. You should be able to locate this information on your statement or online account associated with your credit card. To save you added time, most issuers with online accounts also allow you to input the number of months you want to pay the balance off by and then provide you with how much you have to pay a month to achieve that goal.

Ultimately, it is up to you to understand how much more in interest and fees you may end up paying to effectively budget the total cost of that next vacation. Review your credit card agreement and go online and discover the features your card issuer provides. Signing up for the right credit card and budgeting effectively may make that vacation a little more affordable.

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