Credit cards are an important way to manage finances and may offer many attractive benefits. But holding and using card scan come at a cost. It is important to understand these before taking out any particular card.

The main costs for any credit card are the annual fee and the annual interest (APR). The good news is that with the right knowledge and planning these costs can be minimised – and in many cases avoided entirely. Many cards have no annual fee. And while quoted APRs often appear high, with good card management it’s possible to avoid paying any interest.

This guide looks at each of the main areas of card costs – annual fees, interest, and other card usage charges – and how they can be minimized.

Annual fee

You will see an annual fee advertised for all cards. This is simply the fee that you have to pay each year for holding the card.

Credit card fees vary widely. They range from $0 (no fee) up to almost $800. The two most expensive cards currently on the market are the American Express Platinum card at $695 and the Chase Sapphire Reserve card at $795.

Some of the mid-range paid cards may waive the fee in the first year as an incentive to new cardholders. This is a goodtime to take out such cards and perhaps take advantage of first year bonuses before deciding to whether to continue.

Many of our favourite cards have no annual fee. Good choice include:

·        Ink Business Cash® Credit Card from Chase

·        Bank of America® Travel Rewards Credit Card

·        The Blue Business® Plus Credit Card from American Express

·        Capital One Venture One® Rewards Credit Card

Should you pay an annual fee?

The short answer to this is yes – as long as the benefits outweigh the costs. A no-fee card is obviously appealing, but an annual fee can be worth it in many cases.

Paid cards often offer better cashback or bonuses, as well as travel and other benefits. With some cards as well, the fee may help applicants with lower credit scores.

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Benefits and rewards are better with an annual fee.

There are plenty of cards with no annual fee, and those that do charge a fee largely justify it with the extra benefits offered.

No-fee cards generally offer minimal additional benefits. The best cards will offer an attractive sign-up bonus and ongoing earning from spending – either as cashback or as transferable points or miles. They will not usually include any premium perks or travel benefits.

In the middle, there are plenty of cards with a mid-range annual fee under $200. These cards often offer a better sign-up bonus or ongoing earning rate, but only limited additional travel perks and benefits.  

At the other end of the scale, top end cards with the highest fees of up to $800 offer an extensive range of benefits. These can include lounge access, travel program rebates, travel credits, and complimentary elite status offers. These are valuable benefits, but you need to be sure you will use them enough to justify the fee.

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Fee-based cards may help those with poor credit.

Some cards with annual fees are designed to help those with poor credit. By charging an annual fee, the card provider offsets risk and will accept higher risk customers (including those with poor credit or without a bank account). Such cards may also require a security deposit.

For example, the Open Sky® Secured Visa® Credit Card has an annual charge of $35 and requires a deposit of at least$200, but will potentially take credit scores as low as 300.

The annual fee may bring perks and benefits with specific hotels or airlines.

There are many credit cards that are co-branded with particular hotel chains or airlines, and these will offer specific perks. For regular users of those hotels or airlines, the value of the benefits offered can easily surpass the annual fee.

Hotel cards often offer mid-level elite status (with benefits such as late check-out, room upgrades, bonus points, oramenities when you stay), and some go further with free nights or other hotel credits.

Airline cards have many different benefits. These can include free checked bags, airport lounge access, priority handling, discount on rewards tickets, or even free tickets. As just one popular example, the Alaska Airlines Visa Signature® credit card offers a Companion Fare each year (when spending $6,000 on the card). This gives a free companion ticket on any route for just taxes and a small fee. Used well, this can easily be worth more than the card’s $95 annual fee.

What benefits do you get with the annual fee?

The included benefits are really what you are paying the annual fee. It makes sense to understand what they are, and to ensure that they justify the annual fee for your use.

We will look in more detail at card benefits in another guide, but this is an overview.

No annual fee cards typically offer:

·        A sign-up bonus when you meet initial spending requirements.

·        Cash back earning on purchases – 1% is really the industry minimum, but many no-fee cards have rates higher than this.

·        Possibly an introductory 0% APR for 12-15 months.

Mid-range annual fee (around $75 to$200) cards may offer:

·        Increased sign-up bonus and higher cashback earnings, with possibly more options for bonus earning categories.

·        Specific hotel or airline co-branded cards will offer varied benefits, and discounts with those companies.

·        Medium value travel benefits, such as Global Entry or TSA Pre Check membership, or car rental elite status.

Top-end annual fee (over $400) cards often include premium benefits such as:

·        Very valuable sign-up bonuses (in some cases, almost enough for a return business class flight between US and Europe).

·        Higher miles earning (top-end American Express and Capital One cards for example award five points/miles per dollar on travel).

·        Global airport lounge access.

·        Complimentary elite status with hotels and car hire companies.

·        Various included insurances.

Interest charge – APR (Annual Percentage Rate)

Interest is the other major charge you will face with a credit card. Card providers charge interest on any outstanding balance. This is quoted as an APR (annual percentage rate) and simply represents the amount of interest you pay over a year.

APR is often cited as representing the total cost of borrowing over the year. For a credit card, this is based on the interest rate paid. With other forms of lending (such as loans or mortgages),the APR may also take into account other fees and charges.

Interest can be a significant cost with credit cards if you don't pay your full balance each month. But if you manage your card well and understand the interest terms and rules, it can be avoided.

Many people hold multiple cards for years and never pay any interest. While there are situations where cardholders may want to make use of credit – and are prepared to pay interest to allow this – in many cases they want to avoid additional payments. Paying balances in full each cycle and being aware of promotional rate ending dates are key to avoiding interest charges.

Different APR types

The headline APR quoted for credit cards is the rate you will pay on purchases. This is often quoted as a range by credit card providers, and the exact rate offered will depend on the customer and their credit history.  

APR rates can be fixed or variable. For credit cards, it will most likely be quoted as variable – meaning that it can change (usually in line with a benchmark rate like the Prime Rate).

There are other APR rates that could apply for different transaction types or situations. These are the rates used to calculate interest payments each cycle. Rates include:

·        Purchase APR. The interest rate applied to regular purchases. Normally the headline APR quote by card providers.

·        Cash Advance APR: This is the rate paid on cash or ATM withdrawals. It is usually higher than the purchase APR, and interest starts accruing immediately (without a grace period).

·        Balance Transfer APR: Balance transfers may have different interest rates from purchases. This is often a promotional 0% APR for a set period and then switches to the standard rate.

·        Penalty APR: Some cards will impose a higher penalty APR(also known as a default rate) if you violate terms or miss payments.

How is the APR calculated?

Understanding how interest charges work is important if you want to minimize what you pay. The key points to understand here are:

·        All cards will quote an APR. This could be fixed or variable. Different types of transactions (purchases, cash advances, balance transfers) may have different interest rates.

·        There is a grace period for purchases where no interest is charged. This varies based on the card and time of the purchase, but it can be up to 56 days. If the balance is paid off in this time, you will not pay any interest. Note that for cash advances, interest is usually charged from the time of the transaction.

·        Interest is charged daily. The APR rate is quoted as an annual rate, but interest is calculated based on the balance each day.

Other credit card fees and costs

The annual fee and the APR interest charge are the main costs of a credit card, but there are others. These are generally related to how you use the card and again can be eliminated or minimised if you understand them properly.

Important cost to be aware of include:

Foreign transaction fees. Domestic payments in US Dollars have no extra fees. However, overseas payments in other currencies may incur a foreign transaction fee –typically around 3%. Many of the best cards, including those that focus on travel, waive these fees. This is definitely something to check if you plan to use the card overseas.

Cash advance fees. This fee is charged when the card is used to withdraw cash at a bank or from an ATM. This is often a charge between 3% and 5%, and there may be a minimum charge levied. Remember too, that interest is charged from the time of withdrawal. This is an expensive way to borrow money, and debit cards could be a better option.

Late payment fees. Each credit card billing cycle will have a payment due date (shown on the statement). Failure to make at least the minimum required payment by this date will usually result in a late payment fee. This is around $32 with many card providers (there have been moves to try and cap it at $8 recently).

Returned payment fee. A charge made if your required payment is refused due to insufficient funds.

Avoiding credit cards costs      

Quite rightly, many people look to minimise– or completely remove – credit card costs. Clearly, if the card has an annual fee this must paid, but there are many strategies that can be employed to avoid excessive costs.

In particular, pay attention to the following:

·        Look carefully at any annual fee and if you will get enough value from the card to justify it. There are plenty of cards available with no annual fee.

·        The full balance (excluding any promotional 0% balances) must be paid off each month by the date on the statement to avoid interest payments.

·        Never miss a payment. You should at least pay the minimum amount required to avoid penalty charges or increased APR.

·        Be aware of when promotional 0% rates expire and arrange payment or a further transfer in time.

·        Avoid cash advances or withdrawals if possible. If you use a credit card for this, make a payment to cover this immediately to avoid accumulating interest at a high rate.

·        If you plan to use the card overseas, make sure you choose a card with no foreign transaction fees.

·        Remember that you can always combine credit cards to take advantage of the benefits, rates, and fees that each offer.

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