Credit cards are convenient and popular—76% of Americans have at least one—but have you ever stopped to consider how much your credit cards really cost? Your credit cards might be a more expensive way to borrow money than you realize, putting you on a path toward overwhelming debt and a declining credit score. The answer to how much credit cards truly cost depends on two main costs: fees and interest.
Part one: Fees
There are a variety of credit card fees you might end up paying. The most common fees include:
- Annual fee – Many credit card companies automatically charge you a fee once per year. Not all cards come with an annual fee, though cards with rewards or other premium benefits usually do, ranging from $25 to several hundred dollars. Be sure to keep an eye on the amount: Card issuers are allowed to impose a new fee or raise a current one, so long as they notify you 45 days before the fee becomes effective.
- Late payment fee – If you make a late payment, the credit card company can charge you. The first time you’re late, the fee can be up to $27, and if you’re late again within the next six billing cycles, the fee can be up to $38. (The late fee, however, can never be more than the minimum amount due.)
- Balance transfer fee – A balance transfer is when you pay off existing debts by transferring them to another credit card account. You’ll often be charged a fee to transfer the balance(s), typically around 3% of the transferred amount.
- Cash advance fees – If you use your credit card to withdraw cash from an ATM, you’ll generally have to pay a fee based on the amount of cash withdrawn.
- Foreign transaction fee – If you make a purchase outside of the U.S., many credit card companies will charge you a foreign transaction fee. The fee is commonly 3%, and it’s applied every time you use your card overseas. The fee also typically applies to purchases made from non-U.S. retailers—so even if you were physically in the U.S., if your card was charged by a retailer outside the country, you may have to pay a fee.
- Over-the-limit fee – Credit card issuers can allow you to opt in to a service which lets you borrow beyond your credit limit. If you agree to the service, there are charges involved, usually up to $25 the first time you exceed the limit and up to $35 if you exceed the limit again within six months; however, the fee can’t be larger than the amount by which you exceeded your limit.
- Add-on fees – Credit card companies may also sell you products like “credit protection” or “identity monitoring”, which are additional services that come with monthly or annual fees.
- Expedited payment fees – Normally, credit card companies can’t charge you for making a payment; however, if you make an expedited payment using a method that requires help from a customer service representative, you might be charged a fee.
- Convenience check fees – Some credit card companies give you the option to write checks based on your card’s account limit. You many incur a transaction fee equal to several percent of the amount of each check.
Part two: Interest rates
Most credit card accounts have multiple interest rates which are applied in different scenarios. Here are the most common:
- Purchase rate – Generally, credit card companies offer a grace period for purchases. If you make purchases and pay off the balance in full each month by the due date, you won’t be charged any interest. If you carry a balance on your credit card account—meaning you don’t pay the amount owed in full each billing cycle—you’ll be charged interest on that amount.
- Cash advance rate – If you use your credit card to withdraw cash from an ATM, you’ll be charged interest on the amount withdrawn, usually at a higher rate than your purchase rate. There is generally no grace period, meaning the interest starts accruing right away on cash advance balances.
- Penalty rate – If you violate the terms and conditions of the card—for example, by paying late, exceeding your credit limit, or submitting a payment that is returned due to insufficient funds—the issuer can apply a penalty rate to certain balances. This is typically the very highest rate charged for the account and is often around 30%.
- Introductory or promotional rate – Some card companies offer a lower rate for certain transactions, like balance transfers or purchases, for an introductory period of time. These special rates often last between six and 12 months.
Ultimately, how much your credit card really costs depends on how you use it. If you pay off your purchases in full each month and avoid any fees, it can be free to use a credit card—but if you incur multiple fees and are paying interest, credit cards can get expensive in a hurry. Be sure to carefully read your card agreement to learn about the applicable fees and rates, and make a smart plan for managing your credit card expenses.
Personal loans can often be a less costly, less complicated alternative to credit cards, especially when you’re paying down a big expense over time. Personal loans come with a fixed interest rate and fixed repayment term—and the range of fees is generally more limited—so you’ll know exactly how much the loan will cost you and when your debt will be fully paid off.