The True Cost of Carrying a Credit Card

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There are two kinds of spenders in this world: those that freak out over credit card fees, and those who choose to ignore them completely. We would never suggest you go against the crowd, but really, you don't want to be in either of those groups. It is important to know what fees you are encountering when you're using your credit card, and where those fees are coming from. This knowledge shouldn't deter your spending, but rather it should help you control and monitor your finances in the future.

Right now, we'll discuss some of the most common fees and rates associated with credit cards so you can be prepared to cover them.

Flat Fees

Flat fees are those that do not change with each transaction. They are based on dollar amounts, not percentage rates. Even though these fees are easier to predict than the flexible ones discussed below, they can still add up over time. This chart shows four common flat fees that you might come across with your credit card: annual, late, overdraft, and bounce. Here is a brief explanation of each:

  • Annual fee: This is something that you will be charged every year just for using the card. There are many credit cards on the market that have no annual fees at all, but those that do can cost anywhere from $25 to $250 to use. In most cases, higher fees yield higher rewards, which help make up for the costs. If you rarely use a card with a $200 fee though, you're just wasting money.
  • Late fee: Most credit card companies will charge a late fee if you fail to pay your credit card payment on time. You may also incur this fee if you do not pay off the balance in full by a certain time, depending on the card you use. For most card issuers, the late fee is $10 to $20. If you make your payments on time every time, you can avoid this cost easily.
  • Overdraft fee: This will show up if you charge your card beyond its limit. It is usually around $25. Most credit cards will have buffers on them to prevent you from doing this, but they don't always work. If one of the merchants you work with takes a couple days to process your charges, you might spend part of your balance that has already been spent. To avoid this fee, watch your spending and make sure it lines up with your available balance.
  • Bounce fee: This is a fee that you will have to pay if your payment gets declined. Think of it like the fee your bank charges you for a bounced check. Under usual circumstances, this fee will be about $30, but it may be higher or lower than that. Like with the overdraft fees, you can avoid this cost by monitoring your money.

Flexible Fees

Flexible fees change based on the amount of money you spend. They are based on a percentage of the transaction, not a specific price a card company sets. These costs aren't the same from card to card, and some of them change on a monthly basis. You just have to monitor your credit card statements closely to find out what you're being charged. This chart shows some of the most common flex fees you'll find on your credit card.

  • Cash advance fee: If you ever need to take money out of the ATM from your credit card, you will have to pay a cash advance fee. This is not to be confused with the actual ATM fee that you will have to pay at the machine. That one goes to the ATM provider, but this one goes to the credit card company. In the end, you may spend a lot more getting cash than you realize. Most cash advance fees are around 2%, though there are some card companies that will charge X amount of money per transaction. If you want to avoid this cost, either stop taking out money or see if there are any network ATMs in your area. These are ones that have been pre-approved through your credit card company to provide free withdrawals.
  • Balance transfer fee: This is a fee you might experience if you try to consolidate your credit cards. When you use one card to pay off another one, the one issuing the money charges a fee for its services. 90% of the time, that fee is 3% of the transaction value. However, we have seen fees as high as 5%, so you need to watch out for them. Before you combine any if your credit card balances, know how much they will cost you overall.
  • Annual percentage rate (APR): You've seen this fee a million times over, but do you really know what it is? In essence, this is the interest you're liable to pay over the course of a year with your card. Based on this idea, you should be able to divide your APR by 12 to get your monthly rate, or divide it by 365 to get your daily rate. That's not entirely the case because of the way interest is compounded, but it may give you a ballpark figure of your expenses. You will only have to pay interest like this if you have a balance on your card. Pay it off within the allotted time (via your terms of agreement), and you will be able to bypass this completely. APRs can range from 0% to 25%+, but most stay between 11% and 22%.
  • Foreign transaction fee: This is something you will have to pay if you use your card in another country. It primarily covers the cost of converting your currency into foreign currency. Most cards charge a fee of 3% for this, but some don't  have any foreign transaction fees at all. If you plan to do a lot of spending overseas, these are the kinds of cards to look into.

Other Fees

Of course, you may encounter some "miscellaneous fees" that are specific to your credit card provider. These could be for anything from customer support to the cost of the plastic cards themselves, depending on whom you work with. If you want to fully understand these fees, you need to thoroughly go over the terms of use for your card. If you have any questions, contact the card company to find out what you can do.

With the right research early on, you can adjust your spending habits to reduce your credit card carrying costs. Take the time to prepare because the savings will be worth the effort.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.

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