Understanding Interest & Fees - Part 2

What Are Fees?
Fees are almost a breath of fresh air. Not because they're fun to pay, of course, but because they're far easier for most people to understand.

Fees are payments that the company charges. Unlike interest, these apply immediately and can vary depending on the activity and amount of money involved. These are some common examples:

Late payments on balances
Going over credit limits
Annual fee
Balance transfers
Cash advances
Returned payments
Returned checks
Foreign transactions

All of these will vary, depending on the company. However, we can provide you with a basic understanding of how they work.

Late payments - This is the flat sum you'll pay for making a late payment. Most companies have different amounts you'll pay, based on the amount of the late payment. You should consider this when considering paying late.

Going over credit limits: Some companies will assess a flat amount for going over your credit limit. Not all do, however. It's more common for banks issuing debit cards to evaluate overdraft charges than credit card companies for going over the limit.

Annual fee - This is the annual amount the company charges for using the card. The annual charge is always a flat sum. Cards with many rewards will have higher annual fees to recoup some of the cost of offering those rewards. They also want to encourage consumers to use the card more often to make them more valuable to the user and the company. Some issuers do not charge an annual fee.

Balance transfers - Companies want to make money from balance transfers in some way. They do this first by assessing a balance transfer charge, which is similar to charging a merchant for processing. However, these are often somewhat higher than a processing fee, often 5%.

Cash advances - Not only do you pay interest on money you pull from the ATM, but you'll also have a charge applied, and it will be higher than what merchants pay for processing, about 5%. This does not include what you pay for using the ATM.

Returned payments - If you have to return a payment for some reason, e.g., you make a purchase and realize you don't want the item so return the payment, you'll see a charge assessed. Usually, this is a flat sum based on the amount returned. The company will assess this to recoup the lost value of the processing fee.

Returned checks - It's not common to have checks with a credit card. If you do, however, you might have a charge attached to returned checks. Many companies have no fee assessed for these, but some do.

Foreign transactions - If you're traveling, you may have a fee attached to every purchase you make overseas. The charge is usually a percentage of the payment, and the company imposes it because foreign merchants may not have to pay for processing. The amounts are usually around the same as a regular processing charge. Sometimes foreign transaction costs will be eliminated as part of an incentive program, something to watch for if you travel outside the country often.

Do you understand interest and fees a little better now? We hope so, and we hope this information will help you be a savvier credit card user going forward.