Credit cards offer consumers enormous benefits. They can serve as ready purchasing power in emergencies, help you build a better credit score, and even allow you the convenience of charging everyday purchases such as gas and groceries throughout the month and making a single payment to cover them all. However, if you aren't fully aware of various credit card interest rates and fees, you may pay more than expected for the benefits they deliver.
Credit cards are confusing even for those who have used them regularly. Without fully understanding the various credit card rates and associated fees, you can quickly be drowning in unexpected debt. Now is an excellent time to educate yourself about credit card rates and fees to avoid a few unintended and often painful consequences of credit card missteps.
Understanding Credit Card Rates
Credit card rates vary widely not only from one card to the next but from one individual consumer to the next, as well as from one type of purchase to the next. For instance, most credit cards have an annual percentage rate for most purchases that can increase to a penalty APR for late payments, exceeding your limit, and other terms of service violations. Additionally, they offer separate APRs for things like balance transfers and cash advances. These APRs get applied in addition to fees associated with these types of transactions.
Most credit card APRs are higher than those for non-revolving loans, such as mortgages, auto, and personal loans. The difference is that once you repay the credit card debt, you can accrue new debt on your credit card. To do so with other types of credit, you must take out a new loan with new terms, fees, closing costs, and approval processes. Unfortunately, the luxury of revolving credit through credit cards often comes at a hefty price in interest rates.
How APRs are Set
For the most part, your credit score is a massive deciding factor in determining your APR. There is a prime rate that most commercial banks begin with when issuing credit cards and then add a certain number of percentage points on their own. Then, they use information about individual consumers found in credit reports and identified in credit scores to determine the APR ranges for individual customers.
People with higher credit scores generally have lower annual percentage rates than those with lower scores. The higher your score, the more options are available to you, including the following:
- More attractive annual percentage rates.
- More significant rewards opportunities and diversity of rewards options.
- More favorable terms.
- Lower fees.
- Wider credit availability, including attractive introductory APRs.
Of course, things outside consumers' control affect APRs, such as the shape of the national and global economy and the prime rate. Also, APRs are different for certain types of transactions, such as balance transfers and cash advances.
Types of Credit Card Fees
While certain credit card APRs can be staggering to unaware consumers, various fees can be the final nail for many unsuspecting credit card users. Fees are sometimes hidden in the small print and presented as non-issues. Unfortunately, even nominal fees add up quickly in a month. Some of the more common credit card fees include the following:
- Over-the-limit fees.
- Late payment fees.
- Balance transfer fees.
- Cash advance fees.
- Foreign transaction fees.
- Returned payment fees.
These fees are in addition to the interest rates on your credit card. They may be flat fees, variable fees, or percentages of transactions.
Avoiding and Minimizing Credit Card Rates and Fees
The best way to avoid or minimize the costs of credit card interest rates and fees is to understand what they are and how they work. You can avoid interest charges by repaying your balance in full each month. There are no interest charges to worry about if you have no balance; the same holds for fees. If you know what causes fees, you can avoid those transactions and situations. If you must carry a balance forward from one month to the next, consider paying well above the minimum payment in addition to avoiding transactions that will place you over your credit limit, cash advances, and balance transfers that all have higher interest rates plus extra fees.