Credit Card Charges

Credit cards appear to have only one cost to a user – the interest charged on purchases, but there are a whole raft of hidden charges just lurking below the surface. So, some cards offer an annual payment option in return for certain benefits. What is the best option, and in what circumstance

First, the hidden APR charges

The APR quoted on a credit card covers not only the basic interest charged on the balance, but also incorporates the costs of the company administering the account. Unless that APR is fixed for a certain time period, the rate will be variable and will alter over time.

The ‘naughty naughty’ charges

If the credit card user does not abide by the Terms and Conditions, charges will be incurred. For example, the HBOS card group will charge:

£20 for a late payment
£20 for going over the credit limit
£5 for each and every returned payment
£25 for a stopped credit card cheque

In addition charges may be made for:

balance transfers from another card
replacement of lost or damaged cards

Why an annual charge?

The annual charge often covers items such as increased travel insurance, higher reward rates, or other benefits. For example, American Express and British Airways offer three different cards, at different interest rates.

The basic Credit card: no annual fee, typical variable APR 19.9%
The Premium; annual fee £60, typical variable APR 22.4%
The Premium plus: annual fee £120, typical variable APR 26.0%

The cards with an annual fee offer:

A higher rate of BA Miles earned
A lower threshold for free flight eligibility
Higher travel accident benefit

The British Airways cards are clearly aimed at the business traveller who covers thousands of miles each year with the airline, and whose company pays off the balance every month. Otherwise, as with so many reward cards, the benefits of the points awarded would be negated by the high rates of interest charged.

It is worth scanning the fine print of all credit cards for a low usage charge clause; for example, the American Express Platinum card imposes a £15 account servicing charge if the user spends less than £500 per annum.

Avoiding Charges

Scan the credit agreement fine print to check exactly what may be charged for. Charges quoted in this paragraph are drawn from a Bank of Scotland Platinum Credit Card Agreement.

READ THE FINE PRINT: A Credit Card Agreement is a legal document that is binding, and by signing it the user agrees to the charges laid out within.
Interest free period: Make sure the card offers an interest-free period of up to 59 days, otherwise interest is charged from the day of purchase.
Late payments: set up a Direct Debit for the minimum payment, at 2.25% of the balance or £5, whichever is more. There is a minimum interest charge of £0.50. Of course, if your balance is zero, no interest will be charged.
Over Credit Limit: first of all, ensure that more than the minimum payment is made each month to prevent balancing spiralling upwards. If more credit is required, simply ring up the credit card company and ask for it; any payments over the minimum made will help in this request. Consider a balance transfer to a card with a low rate if balances approach the credit limit.
Cash Advances: cash advance limits are initially set at 50% of the credit limit. Any cash advances attract a fee of 2% of the transaction, with a minimum of £2. Be careful; some 0% purchase rate cards still charge interest on cash advances – and these advances will be paid off last.
Cash Abroad: Using a credit card for buying foreign cash is expensive; 0.65% more than withdrawing cash at home. It is better to use a debit card instead or withdraw sterling from a bank ATM at the airport to buy foreign currency.
Credit Card Cheques: credit card cheques may attract a higher rate of interest than normal purchases (although not in our RBS example.) They will also be paid off before any purchases. A personal loan will probably be cheaper than using credit card cheques for large amounts.
Using the Card Abroad: using a card abroad attracts a fee, in our example, 2.65% on each and every transaction. Combine this with the currency conversion rate applied, plus any charges for withdrawing cash (see above) and the charges can mount up.
Account Management: save the cost of stamps (and expensive postal delays) and make payments via your bank’s online banking site. These can be set up in advance, but must be made seven days before the due date, to ensure the money transfers on time. Printing out online statements to replace lost paper versions also avoids a repeat statement fee of £3.