2 Pesky Credit Card Fees to Avoid and 1 That May Make Sense

By Nathan Hamilton Markets Fool.com

Credit cards tend to have a number of fees cardholders should consider before applying, which is one reason we're advocates for no-annual-fee credit cards.

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But it's important to know that not all credit card fees are created equal. Some cardholders will see their out-of-pocket costs increase unnecessarily with certain fees, but other charges may make sense.

In the following video segment, Motley Fool analysts Michael Douglass and Nathan Hamilton discuss a few credit card fees that cardholders will want to avoid and one that could make sense to pay.

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Michael Douglass: Let's talk about credit card fees. Everyone's favorite, personally. I'm just kidding. But really a thing that we're really excited to talk about, because it's our opportunity to kind of help people think through and avoid them. Here at The Motley Fool, we're all about saving people money and using that money better.

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Even though fees are perhaps not the most exciting thing in the world, I'm personally glad that we're getting a chance to talk about them.

Nathan Hamilton: Yeah. I mean, there's good fees and bad fees.

Douglass: Right.

Hamilton: Which we'll talk about.

Douglass: Yeah. So let's start with cash advance fees. This is a bit of a double whammy. You've got your transaction fee, and then you've got a high APR on the cash advance as well.

Hamilton: Yeah. It's interesting, because if you use your credit card sort of like an ATM and take cash out of it, you're going to be hit with a transaction fee. Many times it's about 3%. But on top of that, you've got a credit card APR. If you look at where credit card companies make money, first is credit card interest.

Douglass: Sure.

Hamilton: I can't remember the exact number of what it is. But, don't quote me on this, but I believe it was north of $50 billion. What I do know, specifically, the third biggest fee that credit cards make money from is, essentially, that cash advance transaction fee. That's $26 billion.

Douglass: Wow.

Hamilton: People are certainly taking advantage of it. Well, I guess you could say, taking advantage of having access to the money. But of course, a good chunk of that is going to banks, in terms of fees.

Douglass: Yeah. I think the second one, total no-brainer, late-payment fees. If you miss a payment, you're going to get charged interest for that. Basically, there's a lot of bad stuff that happens at that point.

Hamilton: Yeah. With a late-payment fee, you are going to be hit generally, I don't know what the average is, but generally you can expect $30-plus for missing a payment. Now, you can call your credit card issuer and request one payment fee be waived, per year. It's actually a right we have as cardholders. So it is something that, credit cards won't tell you this. But you do have that right and, it is something that you should avoid, paying that fee. First, you should probably avoid missing payments.

Douglass: Right.

Hamilton: If possible.

Douglass: Of course, the interest also stacks up during that time.

Hamilton: It does.

Douglass: It's another double whammy if you will.

Hamilton: Your APR may be bumped up as well.

Douglass: Yeah. Big bad. Balance-transfer fees. Now, of course, sometimes this is a fee that can be kind of good or bad, depending. Why don't you walk us through that math?

Hamilton: Yeah. Essentially, paying money to save money is what you're looking at with a balance-transfer fee. So if you're taking a balance from a high-APR card to a 0% introductory APR card, you're going to pay generally about 3% of that transaction, just for the convenience of moving those funds. If you look at what that savings could be to you to save, for example, $5,000 at an 18.49% APR. You're going to pay about $889 in interest charges for a common credit card.

Now, when transferring that to a balance transfer credit card, you're paying $150 fee. The net is around $600-ish where you're going to come out ahead by paying a fee to get lower interest. In those scenarios, we at The Motley Fool would say, "Do everything you can to pay down your debt fast so you can start investing sooner and, essentially, securing your financial independence."

Douglass: Absolutely. We've got a lot more information about financial independence and about using credit well at fool.com/creditcards. We also have actually our picks for the best credit cards for 2017. Certainly, if you're thinking about credit, well, you should be thinking about what the best cards could be based on who you are. We also have a free guide, "5 Tips to Increase Your Credit Score over 800." I'm using a couple of those tips to try to boost mine.

Hamilton: Absolutely.

Douglass: So I'm pretty pumped about it. So we'll see you on fool.com. Nathan, thanks much.

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