Credit card companies make money in a variety of ways. The most controversial way is to charge fees for card usage. Sure, the most common way to make a profit would be to charge high interest rates for a revolving balance, but with a fee here and a fee there, thousands of dollars can be made from just one credit card issued. When you consider how many credit cards are in circulation today, that’s a nice chunk of change.
In 2009, credit-card issuers collected $22.9 billion in penalty fees, up from $19 billion in 2008. The new Credit Card Accountability, Responsibility and Disclosure Act that took effect in February won’t change that as much as you might think. While the Act could erase billions of dollars a year in fees and interest charges paid by consumers, card issuers are scrambling to invent new fees to compensate.
So let’s take a look at those credit card fees, shall we? With so many that qualify as “annoying,” it was hard to slim this list down. But we were able to find five credit card fees that are just downright frustrating.
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The interchange fee is the biggest credit card fee you may have never heard of. This fee is a percentage of each transaction that Visa and MasterCard collect from retailers every time a credit or debit card is used to pay for a purchase. Nearly $2 of every $100 American consumers put on credit cards goes directly to the credit card industry through the interchange fee. While this fee is not directly charged to the consumer, prices on goods and services are increased by merchants to account for these fees, so if they didn’t exist you could be spending less.
In 2007 alone, American consumers paid more than $42 billion in credit card interchange fees, more than twice what we paid in late fees. In fact, credit card interchange fees cost us more than credit card annual fees, cash advance fees, over-the-limit fees, and late fees combined. Additionally, since 2001 alone, credit card interchange fees have risen 133%.
Late fees have become a major profit center for the credit card industry. According to one survey, nearly 60% of consumers pay at least one late fee each year. With fees averaging $35, it’s easy to see how credit card issuers scored about $20.5 billion in penalty fees in 2009.
Issuers have always been sneaking in ways to make consumers late with their payments. Many have shortened the time between when a bill is sent and comes due while others have all but eliminated grace periods. Some issuers declare a bill is late unless received by noon on the due date and many change a bill’s due date from month to month. If a consumer tries to avoid a late fee by over-nighting a payment, he or she finds out too late that overnight payments require a special address and are usually assessed a fee of their own.
Rather than rejecting transactions that exceed a consumer’s credit card limit, or automatically increasing your limit while authorizing the transaction, issuers often let them go through, then charge a hefty over-the-limit fee; as high as $39. To make matters worse, they then raise that consumer to a penalty interest rate! The credit card company repeats the over-the-limit fees each month until the balance is reduced and even if you are under your limit before interest is applied, you can still incur an over-the-limit fee after interest charges hit your account.
For example, let’s say you have a credit limit of $1,000 and before your statement for June comes in the mail, you have a current balance of $990. When interest is applied to your account, it could bring your total balance over $1,000, therefore bringing your balance over the limit. You can bet the credit card issuer will also add a late fee to your next statement.
Paper Statement Fee
While a fee for receiving paper monthly statements appears to be motivated by environmental altruism, it’s more likely a new way for credit card issuers to make a buck.
The Wall Street Journal shares this story: Christopher Moss, who regularly shops at sporting-goods chain Gander Mountain, recently was notified that he will be charged a $1 “processing fee” each time he receives a printed statement of his Gander credit-card account rather than an electronic one. The 50-year-old paralegal said he is prepared to cut up the credit card even though he likes the loyalty rewards that come with it. “It’s not like I can’t afford it, but it’s another little stick in the consumer’s eye,” Mr. Moss said.
The World Financial Network National Bank, which issues the above credit card (along with other retail credit cards), claims that the fee is necessary because of increased paper costs caused by the enhanced disclosure requirements for billing statements mandated by the new Credit Card Accountability Responsibility and Disclosure Act. As much as I want to believe them, I think it’s just another way to sneak an extra buck in there a few million times a year.
Foreign Transaction Fee
With new credit card rules squeezing profit margins at major banks, foreign travelers have become an even easier target for special fees and surcharges. Credit card issuers have traditionally imposed foreign transaction fees to offset the cost of fraud prevention and currency exchange services. Many banks now generate profits from foreign transactions, forcing savvy visitors to do their homework before pulling out their plastic.
Using credit cards to pay for travel expenses can save time and money abroad. When carrying cash, you run the risk of losing it to a pickpocket. Travelers checks reduce that risk, but come with transaction costs. Just finding a way to convert your travelers checks into local currency can take half your day, so if you’re looking for a good travel rewards credit card, you should check out our travel rewards credit card list, which includes cards with no foreign transaction fees!