The Hidden Fees of Credit Cards And How to Avoid Them

Hidden Fees of Credit Cards

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As a credit card user, you may be familiar with their obvious expenses, such as the interest charges. However, numerous other fees can creep up from using a credit card. And if you’re not vigilant, they can pile up fast and become a financial burden.

In this guide, we’ll review some of the most common credit card fees and provide tips on how to avoid them. By Learning the different ways that credit card companies extract money from your wallet, you’ll become a more responsible and financially savvy cardholder. 

Annual Fee

An annual fee is a charge you pay simply for the privilege of owning and using the card. When you open a credit card account with a yearly fee, the charge is added to your bill each year. These fees range anywhere from $20 to several hundred dollars. 

Premium travel cards, such as CIBC’s Aeroplan Visa Infinite Privilege Card, typically charge the highest annual fees, given their lucrative perks and rewards programs. Those with generous cash back rates also command a high yearly price tag. In other words, the more value the card provides, the more you can expect to pay to use it.

If you’re wondering, the most expensive credit card in Canada is the American Express Centurion Card (more commonly known as the Black Card) – this piece of plastic will set you back $5,000 per year! 

How to avoid paying it: The best way to avoid the annual fee is to apply for a credit card that doesn’t charge one. There’s a wide range of options in Canada, which you can easily find using financial aggregator sites like Ratehub. Some credit card issuers, most notably banks, waive this fee if you maintain other financial products with them, such as investment accounts.

If you opt for a credit card with an annual fee, make sure it’s worth it. Ask yourself, “Am I receiving enough benefits from this card to justify the yearly cost?” If the answer is “no,” it’s time to get rid of it and find a cheaper replacement. 

Penalty interest charges

Interest charges are a given if you carry a balance on your card from month to month. But if you habitually make late payments, you could find yourself paying a higher interest rate than the one advertised by the card issuer.

The penalty interest rate, also called the penalty APR (annual percentage rate), is a fee that card issuers charge if you miss too many payments over a short period. It replaces your regular rate (the purchase APR) and can be as high as 30% or more.

Like most fees, this one is hidden in the fine print of your cardholder agreement. Let’s use the RBC Shoppers Optimum Mastercard as an example. For this card, The contract states that the regular interest rate is 19.99%. However, if you don’t make the minimum payment by the due date and have not paid by the time RBC issues the next two statements in the same year, a penalty interest rate of 24.99% kicks in. 

How to avoid it: The surest way to avoid the penalty interest rate is by paying your card balance on time without fail. You’ll be fine if you make the minimum payment on your credit card statement by the due date. Consider setting up automatic payments on your card to ensure you never miss a deadline. Most card issuers offer an autopay feature you can access through your online banking. 

Cash advance fee and interest rate

Cash advance fees appear when you use your credit card to withdraw cash. Typically, they’re a percentage of the amount withdrawn, though some institutions charge a flat fee. For the latter, a common fee structure is $5 for domestic withdrawals and $7.50 for international withdrawals.

Cash advance fees also carry a higher interest rate than the one you pay on regular purchases (usually between 20% and 24%). In addition, interest begins accruing from the day you receive the cash (in other words, there’s no grace period). This feature makes cash advances an expensive transaction. 

Besides ATM withdrawals, many financial institutions treat cash-like transactions, including wire transfers, money orders, and gaming transactions (such as buying chips in a casino) as cash advances. 

How to avoid paying it: As long as you don’t use your credit card to withdraw cash, you’ll never get hit with these extra fees and interest charges. So keep some spare cash handy or build up an emergency fund to avoid this pricey transaction. If you do need access to some extra money, use a line of credit instead of a cash advance, as it’s usually cheaper.

Late payment fee

Late credit card payments don’t just hurt your credit score—they can hurt your wallet, too. If you pay late, you could face an extra charge on your account, sometimes as high as $40 per instance.

How to avoid paying it: To avoid late fees, strive to pay your credit card bill on time every month, even if you can only afford the minimum amount. Set up reminders to make payments on your calendar. Or better yet, enable automatic payments through your online banking—that way, you can pay off your balance without thinking about it.

If you are charged a late fee, contact your card issuer to ask if they can remove it. They may grant you a free pass if this is your first time paying late.

Foreign transaction fee

Do you frequently travel abroad or make purchases online from other countries? If so, there’s a good chance you’ll encounter foreign transaction fees on your credit card statement. Many credit cards charge a fee for transactions made in a foreign currency. These fees vary, but most are 2.5% of the purchase amount.

How to avoid paying it: To bypass foreign conversion fees, use a credit card that doesn’t charge them when travelling overseas or shopping from international websites. Credit cards geared toward travel usually waive these fees, so explore what’s available to keep more money in your pocket before heading out on your next globetrotting adventure.

Balance transfer fee

Balance transfers cards come in handy when you need to consolidate high-interest debt. The reason is that they charge low introductory rates they offer for a limited time. Some offer a zero percent rate, allowing you to save a nice chunk of money that would otherwise get gobbled up by interest. 

However, you’ll have to pay a balance transfer fee to transfer your existing debts to one of these cards. In Canada, balance transfer fees on credit cards usually range from 1% to 3% of the amount transferred. So, if you plan to move $4,500 in debt to a card that charges a 2% fee, you’ll incur $90.

How to avoid paying it: Unfortunately, there’s not much you can do to avoid balance transfer fees, as cards that don’t charge them are a rarity in Canada. Most zero-fee balance transfer cards are only available in the U.S., and even these are hard to qualify for.

Your next best option is to use a balance transfer card that charges 1%, the lowest available fee. Alternatively, you can open a line of credit through your bank and use it to merge your high-interest debt—it’s unlikely you’ll get charged an origination fee. Or, you can exchange your current credit card for a low-interest card with your existing bank—that way, you’ll avoid the balance transfer fee altogether.

Still, if a balance transfer credit card offers an enticing rate and repayment period, paying the fee can be worthwhile if it helps lower your interest costs. Make sure to do some number crunching to weigh the costs against the interest savings. 

Overlimit fee

Each credit card has a credit limit, which represents the maximum amount you can charge to it at any one time. If you exceed this threshold, you may be hit with an overlimit fee, assuming your card issuer approves the purchase that puts you over the edge. These fees can typically range from $25 to $30.

An exception to this rule applies to federally regulated financial institutions where the merchant places a temporary hold on your credit card that breaches the credit limit. An example is when you make a pre-payment for gas at a gas station. The merchant may place a hold on your card that exceeds your credit limit until you finish filing up your vehicle. In this scenario, your card provider can’t legally charge you an over-limit fee, provided the charge itself is below the limit. 

How to avoid paying it: Avoiding overlimit fees comes down to being vigilant with your credit card spending. Maintain a budget and regularly monitor your credit card balance to know how much credit room you have left. You can also set up alerts for when you’re nearing your credit limit.

If you routinely approach your credit limit, contact your card provider and ask if they can increase it. Also, inquire how your card provider treats purchases that exceed the credit limit—do they let them go through or decline the transactions? For some cards, you must opt-in to accept the overlimit fee. Depending on your spending habits, you may feel more comfortable with a card that automatically stops over-the-limit transactions. 

Returned payment fee

Let’s say you apply a payment to your credit card balance, but it fails to go through because your chequing account has insufficient funds. In that case, you’ll get hit with a returned payment fee. Typically referred to as a dishonoured payment fee, these charges will set you back $25 to $48 per occurrence, depending on the credit card issuer. 

How to avoid paying it: Always confirm that you have enough cash in your bank account before paying your credit card balance. If you’re constantly short on cash, consider getting overdraft protection, transferring money from your savings account, or timing your credit card payments to coincide with your paycheque deposit date. You can also apply a smaller payment amount and wait to pay the rest until your bank account replenishes.

Extra card fee

Adding one or more authorized users to your account is a great way to provide your spouse or children with emergency access to credit. It’s also a nifty way to rack up more reward points. 

However, ordering more cards can cost you extra money. Each card you add to your account will result in another yearly fee, usually from $20 to $100, depending on the card type and the financial institution. 

How to avoid paying it: If you intend to share access to your credit card with others, there’s no way around this fee. However, not all credit cards charge authorized user fees, so shop around and see what deals are available. 

The bottom line on credit card fees

Credit cards come with a wide array of fees that can take a huge bite out of your budget. The more you rely on your card, the more likely you’ll incur these extra costs, which is why it’s important to educate yourself about how they work and how to avoid them.

The good news is that most credit card fees are avoidable. So, when shopping for a new card, review the cardholder agreement to understand the various fees and the actions that trigger them. Then, you can enjoy the benefits of your shiny bit of plastic without breaking the bank.

Avoiding unnecessary credit card fees is only one part of shrewd credit management. For more advice about managing high-interest debt, check out these resources:

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