Credit card fee and interest rates determine the true cost of borrowing and the regulatory and market changes can impact those costs.
The Credit CARD Act of 2009 set limits on rate increases and fees that could be charged to credit cardholders. As a result, the card industry became more transparent and set truer inicial rates. For this reason, you get slightly higher upfront fees for consumers, but fewer surprise punitive fees and fee increases.
In this article, you will find out the main fees charged by card issuers and the impact of interest rates.
Common fees incurred by cardholders
Late payment fee
Federal regulation sets limits on credit card late fees. The maximum late fee that can be charged on a first delinquency is $29 and $40 for subsequent delinquencies. However, it can be adjusted annually for inflation.
Higher fees generally function as payment for lucrative rewards programs and they’re more common on private label cards, such as store and gas cards, than on general cards.
Most credit cards don’t charge an annual fee. A CreditCards.com study found that only 26 of the 100 credit cards in October 2020 charged an annual fee and the most common fee was $95. Plus, 7 of those 26 don’t start charging an annual fee in the first year.
Cash advance fees
In the case of cash advance fees, normally they are 5% of the amount being withdrawn. The CreditCards.com survey showed that 4 of the 100 cards allowed to avoid cash advance fees and 2 of those 4 only do so in specific circumstances. Plus, another 3 cards don’t allow cash advance at all.
Debt suspension fees
Debt suspension fees are known as debt protection, debt cancellation plans or payment protection and it’s becoming less common in the card market. Before the 2009 CARD Act, one in five accounts incurred the fee, falling to just over 6% of accounts by 2015.
In 2016, the fees continued falling from 5.8% to 3.3%. According to a 2011 Government Accountability Office report, debt protection fees are 85 cents to $1.35 per month for every $100 of balance.
Balance transfer fees
The cards which charge balance transfer fees decreased in 2020, from 90 of 100 cards to 85 of 100 cards, according to CreditCards.com’s fee survey. Also, 72 of those 85 cards always charge a fee, while 9 don’t charge a fee.
But, cards that don’t charge a fee impose the regular APR on the transferred balance, while those that charge a fee normally impose a lower APR on the balance for a promotional period.
The other 4 cards of those 85 let cardholders choose between avoiding the balance transfer fee if they accept the regular APR on the balance and paying the fee and accepting a lower APR for a period of time. The balance transfer fees are usually 3% of the balance.
Foreign transaction fees
The most common foreign transaction fee is 3%. However, since 2015, foreign transaction fees are falling as a result of the competition between card issuers in an attempt to lure frequent-travelling cardholders. So, if you’re planning to travel again after the pandemic, this is excellent news.
Returned payment fees
Most credit cards will charge a fee when your payment is rejected by your card issuer and the most common cost is $39.
The impact of interest
Interest can be expensive if you carry a balance. However, average annual percentage rate (APR) varies between cards and is pegged to the banks’ benchmark interest rate. The APR on a credit card with a balance is 16.30% and 14.61% for all cards, including those that don’t carry a balance.
In other words, if you make only minimum payments and have a $5,000 balance with that rate could cost $7,396.65 in interest payments, which would pay off the loan in 126 months.
What can impact the rate?
APR by credit card types
The type of credit card can impact the rate. For example, business credit cards have lower rates while cards geared toward consumers with bad credit have the highest rate.
Annual credit card fees by issuers
Different issuers target different audiences and, as a result, fees vary. For example, Citi® / AAdvantage® Executive World Elite Mastercard® charges a $450 annual fee, while CitiBusiness® / AAdvantage® Platinum Select® Mastercard® has an annual fee of $99 and none of Discover’s credit cards charge annual fees.
Annual credit card fees by users
Another thing that can impact the rate is the type of cardholder. This happens because the credit score can impact the types of fees charged. People with the highest credit score usually have the highest annual fees, probably because of the most lucrative credit card rewards.
Students may also be offered different terms
The average APR among students is 3.4%, a number that could reflect the offering of 0% promotional rates.
To summarise, different factors can influence the interest rate consumers pay and the fees they are charged. Said that, you need to consider the APR and any fees during a credit card offer to set the true cost of credit.