Credit Cards Fees

Did you take the time to read on the fees of each credit card before you made your choice? Many of us don’t. I know I was in the don’t category before. But like many of you reading this, you are empowering yourself just like I did. Before I jump into fees you may incur let me explain Annual percentage rate (APR). Annual percentage rate calculates how much interest you will pay on the amount borrowed. Let say you that you borrow $1000 from Uncle Joe and you agree to pay him an annual (yearly) percentage rate of 20 %. After a year you will owe Uncle Joe:

You can calculate the interest rate per day by dividing APR by 365 days (in a year).

20/365 = 0.054795 % per day

Let us say you pay it after 30 days, your interest would be:

($1000* 0.054759 *30)/100 = $16.44

Your total will be after 30 days:

So what are the credit fees one may incur?

1. Late payments – If you do not pay your bill on time you will be charged a fee. My ex-credit card charged $37.00 for this. Think about what you could do with that money. Check you due date, the number of days in your billing cycle are subject to change. Also with some credit card companies, if you are late once, you interest rate can go as high as 32%.

2. Over-the-limit fees – If you exceed your credit card limit you will be charged a fee. Check with you card to see how much this is. Better yet, just do not go over your limit. How do you exceed your limit? Simple answer by over charging. When you over charge, your credit card company can do three things. They can decline, accept with an over-the-limit fee or accept and increase you credit limit. If they do the first and last you are exempt from fees. If they accept with an over-the-limit fee, you will be charged this fee each month till you bring you balance back below your limit. If you need a larger line of credit, call and ask for it to be increased. Companies are more willing to do this than reduce interest rates.

3. Returned checks – Yes there is a fee for returned checks. This is understandable.

4. Payment processing fee – If you pay over the phone companies charge as much as $9.00 maybe more for the automated system and $12.00, again maybe more for a live person. Okay to avoid this check your payment dates and ensure you mail your check or auto-pay via internet on time.

5. Cash advances and convenience checks – When I first got one, I thought it was a thank you gift for being a good customer. I thought it was given to a select few. I was among the select few. How funny was that! I did not go and cash the check immediately, thank goodness. After rejoicing that I was among the select few, I remember telling myself to read the fine print and yes in many words it was a loan. Fees to cash this check are as a much as 3 % the amount and the interest rates to pay back are huge. There is also no grace period. So if you cash it today, tomorrow interest accumulates. Do yourself a favor call your credit card company and ask them to stop sending these checks. Anyway it is a waste a paper, and it is just another way to expose you to identity theft.

6. Membership fees – These could be annually or monthly. I check my statements periodically to ensure that I am paying right amount. One day I see this charge on my statement and called up the credit card company. I was told that this was the annual fee for not updating my records. I said let me update it and you remove that fee. I gave her the same information they had on file and got the fee removed. These fees can be substantial, so call your credit card company and see what they are charging you.

7. Foreign exchange premiums and transactions in foreign currency – If you are going abroad and will use your credit card check your credit card fees. But the best advice is to shop around.

8. Finance charge – Call your credit card company and ask how this is calculated. There are three ways used by financial institutions to calculate finance charges.

a. Adjusted balance: This method subtracts all payments made during the billing period from the balance at the beginning of the billing cycle. For example, if you make purchases totaling $500.00, and you pay during your grace period $200, your finance charge will be calculated on $300 dollars. It is calculated by multiplying $300 by your monthly interest rate. This method most favors you the card holder.

b. Average daily balance: This method is commonly used by credit card companies. In this method, your outstanding balance is added for each day in the billing cycle, and the total is divided by the number of days in the cycle. So each day, the company keeps tracks of your balance, adds your charges and subtracts payments as they occur. At the end of the billing period, they divide that by the number of days in your billing cycle and multiply that by your monthly interest rate to get your finance charge. For example, let us say you have 30 days in your billing cycle. You start off with zero balance. The first 5 days you don’t charge anything on your card, on the 6th day, you have a charge of $3000, and on the 21st you pay $1000. No more transactions after that. Your APR is 19.95%. Okay lets break it down:

Your average daily balance is $2166.67. You have an APR of 19.95%, your finance charge each day will be:

In you billing cycle of 30 days your monthly finance will be:

Sometimes, when you call a credit card company to explain how your finance charge was calculated they will tell you that for every $100 dollars in your billing cycle, you owe a finance charge of $1.64. Ask for you average daily balance, and multiply that by $1.64 and divide by $100. You should get the same value as above. The procedure for calculating for every $100 in your billing cycle using numbers from the example above is:

Multiplying that by your average daily balance and dividing by $100 you have:

c. Previous balance: This method in no way favors you. If you do not pay your bill completely before your grace period is over, you will be charged for the whole amount regardless of if you made a payment. Using the same example as above, if you pay the $1000, your balance is $2000. If at the end of the 30 days you do not come up with the cash to pay that balance, your finance charge for the billing cycle will be calculated as follows:

This is a little under $14 per month higher than the average daily balance method and a little under $17 higher per month than the adjusted balance method.