Understanding and avoiding credit card fees
By Benjamin Salisbury
Whether you're a veteran credit card user or just getting ready for your first plastic, it's vital to understand what fees come with credit cards and how they work. Understanding interest, for instance, can be the key to getting out of debt. You should know why you're being charged, where your money goes and how to keep fees at a minimum.
The Financial Conduct Authority (FCA) appears to be in agreement that not everyone understands credit card fees. In 2014, the FCA launched a market study to analyse if the UK credit card market is working in the best interests of the consumer and to understand if consumers are always aware of their fees, charges and interest.
No matter how long your card has been in your wallet, take some time to review the most common fees and make sure you aren't falling into a trap that puts more money in lenders' hands and less in yours.
The most common fee: interest
The main fee incurred by using a credit card is interest on the credit card balance, Ian Williams, spokesman for the Debt Advisory Centre, said in an emailed response to questions. If you cannot pay off your balance in full when the bill is due (for instance, if you pay only the minimum), the remaining balance will accrue interest. In some cases, that could mean it will take you years to pay off a relatively modest balance.
Interest is calculated using an annual percentage rate (APR) set by the creditor. You are charged a pro-rated portion of your annual APR when you do not pay off the entire balance by the payment due date. To avoid any interest charges, you will need to pay off the entire balance by the due date.
The minimum payment is normally based on a low percentage of your debt - say, 2% -- or a low value -- maybe £10 a month, plus interest.
If you've ever wondered why you're paying £100 per month but your credit card balance of £3,000 is hardly budging, it's likely because only a small portion of your £100 payment is going toward the principal itself. The rest is interest, and the issuer will continue to charge interest until you pay off the balance in full.
"The minimum payment set by your card company is just that -- a minimum," Williams said. "Even if you can't afford to repay the whole balance on your statement, you should aim to pay the most you can manage."
Interest is the most common fee, but you can accrue other fees and charges for late payments, cash withdrawals or going over your credit limit. Some credit cards come with product fees, an annual or monthly fee attached to a specific product, often in exchange for some type of reward or benefit. Other fees include charges for using a credit card overseas and balance transfer fees.
"The card provider is obliged to tell you what fees they are charging you," said Williams. "You will find them listed on your statement."
You should avoid making late payments, and you should definitely aim to pay at least the minimum each month. Fail to do so, and you'll find extra charges along with the interest.
"If you fail to make the minimum payment, or pay less than the minimum, then most credit card providers will charge you a fee. If you make your payment late then most card firms will also charge you," Williams explained.
You can also receive a fine if you breach your credit card limit. For all three of these offences - late payments, missed payments, breach of credit limit - the maximum issuers can charge you is £12, and most do, said Williams.
You should also try not to use your credit card to withdraw cash. Using your credit card at an ATM is called a cash advance and, instead of going on your statement like a regular charge that will only accrue interest if you don't pay it off by your due date, cash advances collect interest from the day you withdraw the cash. If you withdraw on the first of the month and wait until the 20th to make your regular payment, you'll have accrued interest for 20 days already.
To avoid those charges, withdraw cash using a debit card instead.
Avoiding and minimizing fees
The single best way to avoid credit card fees is by paying off the balance in full each month. Using your card in this way also helps boost your credit rating.
"Set up a direct debit to ensure at least the contractual minimum payment is made each month, this way you will not have to worry about remembering to physically make the payment each month," Laura Brodkin, Media Relations Manager from Lloyds Bank, suggested in an emailed response to questions.
Published: 8 January 2015
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