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Understanding credit card fees
Credit cards can offer many benefits, but if you fall foul of credit card fees and charges, they can also be very expensive. Here’s how to make the most of your plastic while avoiding credit card fees.
Used wisely, credit cards can be a great way to get access to everything from the best foreign exchange rates to interest-free borrowing and rewards on your spending. But to get value for your money, you need to understand credit card fees.
What are the different types of credit card charges?
Credit card providers impose a range of different fees and charges, most of which can be avoided if you’re smart.
That’s why you should always check the summary box when applying for a credit card. This summary gives a breakdown of potential costs and fees, including both standard charges and penalty fees (which should only kick in if you break the rules).
Standard credit card fees explained
The main standard credit card fees to be aware of are:
Interest
Like other forms of borrowing, credit cards charge interest on your balance – unless you clear the debt in full each month. The rate of interest, known as the APR, is usually quite high – typically around 19% – unless you’ve got an interest-free offer for a set period.
How to avoid this charge: With a standard credit card, the easiest way to avoid paying interest is to clear your balance in full every month. If you need a longer-term borrowing option, you might also consider selecting a card that provides 0% on balance transfers or purchases, thus enabling you to avoid interest payments for a year or more.
Compare our best 0% balance transfer and purchase cards
Balance transfer fees
Some credit cards offer 0% interest on balance transfers when you move existing debts from another credit card or your current account overdraft on to the new card. However, providers generally impose a fee, known as a balance transfer fee, for this service. This fee is typically a percentage, say 3%, of the amount being moved.
How to avoid this charge: There are not many fee-free 0% balance transfer credit cards on the market. If you can’t find one for which you can qualify, your best bet is probably to shop around to find the card that offers the longest 0% period with the lowest fee.
Find out how to transfer a credit card balance
Overseas usage fees
When you make a foreign currency purchase on your credit card, you will almost always be charged a handling fee, also known as a foreign transaction fee. In most cases, this fee is around 3% of the total purchase. So, if your purchase costs £100, you will be charged £103. It may not seem so much, but these credit card charges can quickly add up when you’re on holiday.
How to avoid this charge: The easiest way to avoid this charge is to pay in cash. Alternatively, you can take out a specialist travel credit card that has no foreign transaction fees and gives you the current exchange rate of the issuer (Visa or Mastercard, for example). These exchange rates are often better than those available on the high street.
Cash machine withdrawal fees
Credit cards are designed for making purchases. If you use one to withdraw money from a cash machine, it’s considered a cash advance. You have to pay a fee for cash advances along with a higher rate of interest, starting from the day you take the money out. The same also applies to foreign currency bought on most credit cards.
How to avoid this charge: Keep your credit card for purchases and use your debit card when you need cash.
Annual usage fees
Some credit cards charge a fixed annual or monthly fee. This fee is typically charged in return for benefits such as rewards or cashback on spending. Fees can vary widely, ranging from as little as £12 a year to as much as £250.
How to avoid this charge: If you want the perks offered by the card, you have to pay the annual fee. However, some reward cards waive the annual fee for the first year, enabling you to take advantage of the benefits for free during that time. Another option is to choose a card with no annual fee.
Compare our best no-annual-fee credit cards
Credit card penalty fees explained
The main credit card penalty fees to be aware of are:
Late payment fees
If you miss the minimum payment deadline agreed upon, you'll be subject to late payment fees, typically around £12. However, the overall cost of incurring such fees could be higher due to their adverse effect on your credit report. Additionally, missing payments may lead to the loss of certain benefits, such as the introductory offer on your card.
How to avoid this charge: The best way to avoid missing payment dates and incurring late payment fees is to set up a Direct Debit from your current account to ensure you make at least the minimum payment. Ideally, you should pay off the full amount owed each month.
Exceeding your credit limit fees
If you go over the credit limit set by your credit provider, you usually have to pay a fee of around £12. Exceeding your credit limit also impacts your credit score, making it harder for you to borrow in the future.
How to avoid this charge: Stay within your credit card limit. If you think you might be in danger of exceeding it, contact your credit card provider as soon as possible to see if you can arrange an increased credit limit.
Under usage fees
Certain credit cards and store cards charge an under-usage or inactivity fee if you don’t use them for a set period, such as 12 months.
How to avoid this charge: The best way to avoid paying a fee for failing to use your credit or store card is to cancel cards you no longer use.
Do interest charges on a credit card affect your credit score?
The interest you pay on your credit card under normal circumstances should not affect your credit score.
However, your credit file will note if you miss a payment date or exceed your credit limit. If your credit file is impacted in this way, you may find it more difficult and expensive to borrow in the future.
Having a lot of debt on one or more credit cards could also impact your ability to borrow more money elsewhere. High card balances relative to your credit limit can also have a detrimental effect on your credit score.
Can you dispute incorrect credit card charges?
Yes, you can dispute inaccurate or wrongly imposed credit card charges—although you have to provide evidence to support your claim to get a refund.
If you spot any fees or charges you don’t think you should have to pay, contact your card provider as soon as possible.
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