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Credit Card Fees Explained: The Essential Types to Be Aware Of

Kenneth Boyd Updated: September 27, 2023 • 5 min read

Key Points:

  • Credit card interest and fees may average over $1,000 a year per US household.

  • Credit card annual fees, perks, and annual percentage rates can vary greatly, depending on the card you choose.

  • In some cases a credit card fee can be avoided if you plan your spending and card payments carefully.

Credit cards can be a useful financial tool, but if you don’t understand how credit card fees are charged, card fees can accumulate quickly. With proper planning, you can use credit cards and reduce or eliminate many fees that make card use expensive. This article discusses the most common credit card charges and how to minimize them.

With proper planning, you can use credit cards and reduce or eliminate many fees that make card use expensive.

Types of Credit Card Fees

What are two ways credit card companies make money? Interest payments and fees are two revenue sources for card companies. Some fees are fixed at a dollar amount, while others are credit card transaction fees.

The types of credit card fees you incur depend on how you use the card when you pay the balance and if you take cash advances or perform balance transfers.

The Consumer Finance Protection Bureau (CFPB) reports that US consumers paid $117 billion in credit card interest and fees in 2020 or about $1,000 a year per household. Credit card charges can have a large impact on your finances.

The credit card fees you incur depend on the card you choose and how you use the card over time. Some types of credit card fees can’t be avoided, such as processing fees and interest charges on your card balance.

There are additional fees that consumers can avoid, including fees for cash advances, late payments, balance transfers, and returned payments.

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Annual Fee

Annual fees are charged for being a cardholder, and the fee is charged once a year. If a credit card issuer charges an annual fee, the issuer may provide perks, such as reward points or cash back on purchases.

Not all card companies assess annual fees, and you should consider if the card’s perks are more valuable than the cost of the annual fee. The CFPB found that the average annual credit card fee was $94 in 2020, and annual fees may be much higher if more benefits are provided to cardholders.

Processing Fee

When a merchant accepts your card for a purchase, several entities are paid for processing the payment. Cardholders are charged processing fees (or interchange fees) for card processing costs.

This fee is charged per transaction, and the average cost ranges from 1.5% to 3.5% of the purchase. The fee payment is shared between the card issuer, one of the credit card networks (Visa, Mastercard, others), and the company that accepts your card payment. When you use your card at a point of sales (POS) terminal, the merchant must display the processing cost percentage. The processing cost is also disclosed on the receipt.

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Cash Advance Fee (A.K.A Cash Equivalent Fee)

Some cards allow cash advances, which are ATM cash withdrawals that increase the credit card balance. A cash advance fee may be a fixed rate (typically 3% to 5%), or a cost per transaction, averaging $5 to $10 per withdrawal.

Some card companies charge a higher percentage or a fixed rate, meaning you may pay far more than $10 for a large withdrawal. Note also that cardholders are charged interest on cash advances immediately, often at an APR higher than a credit card purchase transaction APR.

Interest Charges

Cardholders are charged interest on unpaid cards, including purchases and cash advances. Interest payments are typically due each month. Two factors determine the amount of interest due: the annual percentage rate (APR) and the unpaid balance. Forbes reports that the average credit card APR is 28.05%.

Card issuers may offer a grace period, defined as the number of days from the end of the billing cycle and the payment due date. Interest does not start to accrue on the unpaid balance until the end of the grace period. The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 sets the minimum grace period at 21 days.

Late Fee

Cardholders may be charged a late fee for a missed payment or for not making the minimum required payment on the due date. Late fees are charged per transaction; the credit card fee can range from $25 to $40 on average.

Card issuers may also charge a penalty APR after late or missed payments, and the penalty APR is higher than the rate for other payments. A penalty APR may be charged until a specific number of monthly payments are paid on time or indefinitely. Currently, a penalty APR can be as high as 29.99%.

Balance Transfer Fee

Some cardholders transfer balances from one card to another to take advantage of a lower interest rate promotion. Many credit cards will charge a balance transfer fee, which is a percentage of the amount transferred. However, some card issuers will promote balance transfers at no cost.

Balance transfer fees are assessed by the transaction, and credit card transaction fees average between 3% and 5% of the amount moved. If the new APR is low enough, the interest savings may offset the cost of the fee over time.

Foreign Transaction Fee

When a cardholder makes a purchase outside of the US or through an overseas merchant, the cardholder may be charged a foreign transaction fee. The fee is charged per transaction; the average rate is 1% to 3% of the purchase.

Many consumers do not consider the impact of this fee because it’s only charged on foreign transactions. If you’re making a large purchase, confirm if a foreign transaction fee will be charged.

Returned Payment Fee

The card issuer may charge a returned payment fee if a customer’s card payment cannot be processed due to insufficient funds.

These fees are only charged when a payment is returned. The dollar amount of the fee is determined by state law, and the average fee is $20 to $40.

The Bottom Line

What are two ways credit card companies make money? To understand credit card fees and how card companies profit, be proactive. Review the card issuer’s website carefully, and call customer support to get your questions answered about the fees you may be charged. Pay your monthly balance in full each month.

In addition, you might consider other financing sources, such as a debt consolidation loan. With proper planning, you can improve your financial situation.



Are all credit card processing fees the same?

Processing fees can vary greatly, based on the type of card you use, the dollar amount of a particular transaction, and if a purchase is made outside the US. To fully understand processing fees, read the card issuer’s fee disclosures carefully.

How do you determine if an annual fee is worth it?

Determine the benefits and perks offered by the credit card company. You may be able to earn cash back or get access to discounted (or free) products and services. If the annual fee is less than the dollar amount of the benefits you can earn, paying the annual fee is worth it.

How much are credit card fees for merchants?

This fee is charged per transaction, and the average cost ranges from 1.5% to 3.5% of the purchase. If you present a physical card to the merchant, the fees may be slightly lower than a payment processed remotely.

Written by Kenneth Boyd

Kenneth Boyd is a four-time Dummies book author, including the book Cost Accounting for Dummies. Ken writes, blogs, and provides video content on business topics.