How fees can add to credit card interest

It is possible to get a credit card that charges a very low interest rate over the lifetime of the loan, particularly for borrowers with good credit ratings. However, some of these credit cards charge exceptionally high fees, as well, causing the card holder to pay more for the credit than expected.

Not all long-term, low interest rate cards are like that. Some banks and issuing financial institutions pride themselves on their transparent charging structure and rely on their ability to sift out bad credit risks to make the very low interest rates on their credit cards feasible. However, there are others that advertise very low interest rates, but which make up the difference by charging high fees instead, offerring less savings than their interest rates indicate.

In such a case, one of the fees that’s commonly higher than normal is the annual fee. This effectively gives the credit card a higher “rental charge” and so if there isn’t a significant balance carried on the card to take advantage of the low interest rate, it may be more cost effective to look instead for a card without an annual fee, or with a low annual fee.

Other long-term, low interest rate credit cards charge an inactivity fee. If the card is not used within a certain duration of time, or is not used enough, then a charge is added to the balance. If an inactivity fee is charged on a monthly basis, the cumulative total is likely to be higher than the amount saved on the interest rate.

Penalties are another area where credit card providers can add to the cost of a card. These penalties can be for spending over the credit limit or not making the repayments on time. Penalties may accrue on a daily basis, so for example every day the balance is over the credit limit, there will be a charge. There may also be penalty interest rates, which can be higher than the minimum repayments.

Other fees and penalties that can be heaped on a credit card include those for foreign currency transactions and cash advances. Not all fees will be obvious, so it is a good idea to compare the obvious fees to the interest rate before selecting a credit card.