Most people are aware that interest rates can make credit card use very expensive. But many people are unaware of the other big expense in using a credit card -- fees. Fortunately, if you choose your card well and use your card carefully, you can avoid most or all of expensive credit card fees.
(To learn how to shop for a credit card, visit our How to Choose a Credit Card topic area.)
Your credit card will come with a credit limit -- the maximum amount of credit that will be extended to you. In the past, if a particular credit card charge would put you over your credit limit, the transaction would be rejected. If you wanted to make a charge that would put you over the limit, you had to pay down your balance first.
In recent years, credit card companies allowed customers to make charges that put them over the limit. Of course, this convenience did not come free -- the companies charged hefty fees for over-limit charges, and usually did not tell customers that they were going over the limit.
This changed somewhat with the enactment of the Credit Card Accountability and Disclosure Act of 2009 (also called the CARD Act). (To learn more about the CARD Act, see The Credit CARD Act: More Protection for Cardholders.)
No fees unless you opt in. Under the rules of the CARD Act, a credit card company cannot charge over-limit fees unless you “opt in,” that is, agree in advance that the company can allow transactions that would put your balance over the credit limit. Even if a credit card company processes a transaction over your limit, if you did not opt in, the company cannot charge you an over‑limit fee.
How much can over-limit fees be? If you do opt in, the company can charge over-limit fees. The CARD Act places some limits on those fees. The company can only charge you one over-limit fee per billing cycle, but it can charge for the same over-limit transaction in a total of three billing cycles if you do not bring the outstanding balance below the limit before the bills are due.
Don't opt in. The best strategy to avoid over-limit fees is simple—don’t opt in! And don’t add an over-limit protection plan. This may require some diligence on your part, so that you don’t accidentally opt in. For example, a credit application may have a box to check or a line to initial or sign that is really an agreement to allow over-limit transactions.
Not sure if you may have opted in by mistake? If you opt in, the company must provide a written statement confirming you agreed to let them process over-limit transactions. You can revoke this agreement at any time. (The over-limit fees would still apply to over-limit transactions already processed.) You can revoke the agreement with the same method you used to opt in. So, if you opted in by phone, you can revoke your agreement with a phone call. Not certain how you opted in? Contact your credit card company and find out. As always, send a confirmation letter in case there is a dispute later.
Many credit card companies charge penalty fees for:
• late payments
• over-limit charges (if you opt in), and
• payments returned for insufficient funds.
The CARD Act limits these fees to the actual amount the violation cost the company, or to a maximum of $25 for the first violation and $35 for a second violation (if it occurred within six billing cycles of the first violation). Still, these fees can add up. Be sure to pay your bill on time and make sure you have enough money in your bank account to cover your payment.
Only about 5% of credit cards charge annual fees, so look for one that doesn’t. But, you also have to look out for other fees. New fees seem to pop up all the time. Now that the CARD Act has limited the amount of fees for late payments, returned payments, and over-limit charges, credit card companies may get even more creative in finding ways to add fees. For example, one card targeting people with poor credit charges a one-time $45 “processing fee.” Some of these fees may not be included in the written disclosures.
This is a partial excerpt from Solve Your Money Troubles, by Margaret Reiter and Robin Leonard (Nolo).