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Credit card charges explained

There are several fees and charges related to credit cards that you should be aware of and try to avoid

If you use a credit card sensibly and know how to avoid all the potential credit charges and fees, they can be a versatile financial asset giving you everything from the best foreign exchange rates to interest free borrowing.

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Credit cards can be useful for getting cashback and retail rewards, as well as managing debts when you have a balance you want to transfer to a 0% deal.

Credit cards can be a great way to spread the cost of a purchase over a few months if you have a long 0% purchases offer, or even to pay for things before payday (provided you can pay back the full amount at the end of the month to avoid paying any interest).

There are also some credit cards for foreign purchases that carry no handling fee – most debit and credit cards charge a fee for making purchases abroad,  avoiding this could save you a lot of money on holiday.

Interest charges

Credit cards interest rates, listed as APR, is is how much your credit card debt will cost you if you don’t pay back the full amount at the end of the month or 0% purchases period.

If you have a credit card, with an interest rate of 20% and had a debt of £1,000, but were repaying the debt with £50 every month, it would take you 25 months to fully pay it all back including the interest of £203. So the total you would have paid for borrowing £1,000 would be £1,203.

However, nearly all credit cards will give you an interest free period usually lasting a month or two (most commonly 56 days). If you repay the balance in full and on time you won’t pay any interest.

Credit card cash withdrawal charges

One of the most expensive credit card charges is the cash withdrawal fee. Not only does this almost always result in an immediate fee of around 3% (with a cash minimum of around £3) of the cash you took out (so even if you took out £5, you’d still be charged the cash minimum), but you will also be charged interest immediately and daily until it is fully repaid.

The interest rate on cash withdrawals is also usually higher than the standard headline APR you would have seen advertised. Even if the cash machine says it’s free, this never applies to credit card cash withdrawals.

It’s important to also note that credit cash withdrawals are simply seen as a ‘cash transaction’.

This means any type of transaction you make that could be deemed as a cash transaction would face the same credit card fees. Credit card cash transactions typically include, but not limited to, cash withdrawals, buying betting or gambling chips, buying foreign currency, and any type of purchase that involves getting cash or a type of currency.

In short, never use your credit card and instead always use your debit card for withdrawing cash and for any other type of cash transaction.

Transfer fees

If you have debts on your credit card and want to reduce the amount of interest you pay, you could take out a balance transfer credit card, which will come with a deal allowing you to repay the debt in monthly instalments at 0% interest for a long period of time.

Many of the best balance transfer credit cards on the market come with 0% deals lasting over two years, sometimes more than three years.

However, in order to get a balance transfer credit card you will need to pay a balance transfer fee up front.

A balance transfer fee is usually a percentage between 1% to 4% of the total amount you plan to transfer. Generally speaking, the longer the 0% interest deal the higher the balance transfer fee will be, and vice versa.

So it’s important to weigh up the total cost of the deal, not just how much you could save in credit card interest.

Ask yourself, will a 4% transfer fee will be worth being able to pay your balance off over two years and a half? Could you potentially pay off the debt quicker and get a balance transfer credit card with a lower fee? It always works out cheaper to pay off credit card debt earlier.

Late payment penalty

As you might expect with a credit card late payment fee, you get charged a penalty fee when you don’t make the payment in time. This credit card fee is usually around £12 but it will cost you more than that because of the impact it will have on your credit rating. Any special introductory offers you had on the credit card could also be removed.

To avoid having a late payment fee and risking your credit score, always set up a direct debit on your credit card so that it pays a set, or ideally the full amount each month.

Going over your credit limit

Similarly, if you go over your credit limit, even by a couple of pennies, you will be charged a fee of around £12. This will also have an impact on your credit score, meaning it will be harder for you to borrow in future.

Make sure you always stay within your credit card limit and if you think you might be in danger of doing so contact your credit card provider as soon as possible. If you have been a customer for a fair amount of time and have generally been reliable you might be able to request a credit limit increase. Doing so is far better than paying the credit card fee for going over your limit.

Foreign purchase fees

You will almost always be charged a handling fee whenever you make a purchase in a foreign currency on your credit card. So if you buy from an online shop selling in a foreign currency, or if you are on holiday and paying the bill at a restaurant, you will be charged a foreign transaction fee.

Foreign transaction fees are avoidable, but a bit of carelessness in deciding which way to pay can result in needless credit card charges. Most credit cards have a foreign transaction fee of around 3% of the total purchase, so if you paid £100, you will be charged £103. It may not seem so much but when on holiday these credit card charges can quickly add up.

The easiest way to avoid this charge is pay with cash, or get a credit card with 0% foreign transaction fees.

These credit cards will give you the current exchange rate of the issuer (Visa or Mastercard, for example). These exchange rates are similar to, but often better than what you get at your local foreign currency exchange shop, plus it means you don’t have to risk carrying lots of cash around with you.

These credit cards are useful for avoiding pointless fees but could help you save some cash too.

Finally, when applying for a credit card always read the credit card summary box, which gives a breakdown of all the potential costs and fees.

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Compare credit cards with uSwitch

Compare all sorts of credit cards from 0% cards to rewards cards.

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