Credit Card Interest Rates and Fees Explained

Credit cards have become the go-to payment method for most consumers. They’re so easy to get that you can apply for a card and get instant approval at a big-box retail store. Unfortunately, cashiers rarely tell you about the important features of the card they’re offering, such as the associated rates or fees. Why would they? If you were told that a card had an interest rate of 18%, would you be as likely to take the offer?

Credit card interest rates

When you use your credit card, you are essentially taking out a loan. The annual percentage rate (APR) is the interest rate applied to your card balance, assessed when you do not pay your balance in full by the end of each billing cycle. This rate varies from card to card, ranging from around 6% to well over 20%.

Your interest rate can change depending on the type of purchase you make. For example, your credit card company may assess a different interest rate for a balance transfer than for a cash advance or a purchase made during a promotional period. The easiest way to find out the various interest rates is to read the credit card disclosure.

Special circumstances

Zero Interest Promotional Rate: Some credit card companies offer zero percent financing for a certain period—often between three months and a year, or for special dates (e.g., the holiday season). These deals can save you money, but you must ensure you pay them off before the promotional period ends. When the promotion ends, the rate will increase to the regular APR, and most card companies charge for the accrued interest on unpaid balances. Read the fine print on these cards to know when the promotional period ends and what charges will be applied to outstanding balances.

Late payments: When you are late on a payment, your APR may go up. According to The Balance your credit card company can charge a penalty rate if you’re delinquent on a card over 60 days (in addition to a late fee). The penalty rate is the highest rate the credit card company charges, potentially 29.99 % or more.

Credit card fees

In addition to being charged interest on a purchase, there are various fees a credit card company can charge you. These fees include:

Annual Fees

As the name suggests, an annual fee is charged each year. Not all credit card companies charge an annual fee; premium or rewards cards are most likely to charge them. A typical annual fee on a premium credit card is around $450, some of which may be offset by travel credits or other rewards. It’s best to do your research to make sure the benefits are worth the annual fee.

Foreign Transaction Fees

Purchases or cash advances made outside the United States or in foreign currency are referred to as “foreign transactions.” When the credit card company makes the currency conversion, they debit the amount from the consumer’s card in United States dollars, plus an extra one to three percent, depending on the card. There’s no easy way to avoid these fees other than bringing cash with you, but you can request that the credit card company waive the fees, particularly if you are a big spender overseas.

Balance Transfer Fees

A balance transfer occurs when you move a balance from one credit card to another. The fee charged on transfers is often between one and five percent of the balance. Balance transfers can be a great way to save money. People often transfer funds from a high-interest credit card to a lower-interest or zero percent interest credit card, potentially saving tens to hundreds of dollars in interest charges, depending on the balance. As far as credit card fees go, this could be the most rewarding one to pay.

Cash Advance Fees

A cash advance allows you to withdraw cash from your credit card up to a specified amount. You can take an advance on your card using the checks your credit card company sends you through the mail, at an ATM, or at a financial institution. Cash advance fees can range from three to five percent of the amount borrowed. Interest rates on cash advances are typically higher than normal purchase rates and may compound daily rather than monthly, so you should check the terms on your card to see how your credit card company charges for this type of activity. In general, cash advances are the most expensive way to borrow money, so it’s best not to take one unless you absolutely have to.

Late Payment Fees

A late payment fee is assessed when you miss a payment or pay less than the minimum amount. Fees can range from $15 to $35. Avoid this fee completely by paying your credit card bill on time.