How fees can add to credit card interest

Credit card fees are a hidden cost that can add to the real cost of using a credit card, and which should be included in any comparison of credit card deals. They can be particularly important with low interest credit cards, both because the fees can be higher and also because the interest as a proportion of the cost will be lower.

There are a number of fees that credit cards charge. For example if a borrower wants to have their credit card in a design of their own choosing, then they will need to pay the credit card provider a fee for the service. However the two fees that are most important when considering a card offer are the annual fee and inactivity fees.

The annual fee is a fee charged to cover administration costs, such as printing and sending out monthly statements. In some cases there are low cost credit cards that do not charge an annual fee but have a slightly higher rate of interest.

The second fee that should be considered is an inactivity fee. This is a bit more sophisticated in that it charges for the administration of the credit card by charging the card holder if they do not maintain a certain level of activity, such as purchases or cash advances. If there has been some activity, the merchant fees charged to a shop or service provider to cover the processing costs will also tend to pay for the card’s administration. But if a card is never used in a year, the combined inactivity fees will tend to be higher than the annual fee.

Penalty fees should also be considered if there is a real possibility of breaching the credit limit or not paying the invoice on time.

To calculate fees as an equivalent interest rate, the borrower will need to estimate the annual balance and total up the annual and inactivity fees that are likely to be charged. This should be divided by the balance, which will provide the equivalent interest rate. For example if there are fees of $80 on a card with an average balance of $4,000 through the year, then the equivalent interest rate will be 2%. This should then be added on to the headline interest rate.

As a general rule, fees will tend to affect those who are borrowing less rather than those who are borrowing more.