At some stage, we’ve ‘borrowed’ our flatmate’s shampoo, someone’s sauce from the work kitchen, and even a few bucks from mum and dad. A credit card is kind of similar: it’s money you borrow from a bank, except it comes with fees and charges and this time, you must pay it back (sorry mum and dad).
Credit cards can be very handy if you know how to use them properly. They can help you jet off overseas, save on your home loan, take care of a nasty utility bill, and even replace your flatmate’s toiletries. However, they do come with fees and charges which can quickly add up if you don’t use your credit card responsibly.
To help you avoid unnecessary credit card debt and paying back more than you need to, here are some common fees and charges along with a rundown on what they actually mean and tips to avoid them.
1 – Annual fee.
Some credit cards may charge you an annual fee – they can range from roughly $20 to $700. As a rule of thumb, the more features a card has, such as ‘complimentary insurances’ and rewards points, the higher the annual fee is likely to be.
Saving tip:
If you don’t take advantage of the card’s features, switch to a simpler card with a low rate or no annual fee.
2 – Cash advance fee.
If you withdraw cash or transfer funds from your credit card, you’ll likely be hit with a cash advance fee. The amount can vary by provider. So for example, if you use your credit card to get $250 out at the ATM, you will be charged $5 if your credit card’s cash advance fee is 2%.
3. Cash advance interest rate.
Unfortunately, there is usually no interest-free period (see below) on cash advances and they also typically get charged a different, often higher interest rate which often applies from the moment the transaction goes through – no ifs and no buts.
So if we take the example above and you’ve withdrawn $250 out at the ATM on your credit card (which charges 21.99% interest on cash advances) and you don’t pay it back for 44 days, you will be charged $6.63 in interest on top of the $5 cash advance fee you’ve also paid.
So taking $250 out of your credit card has ended up costing you $11.63.
Saving tip:
Only use your credit card for cash advances in emergencies.
4 – Interest-free period.
You may have noticed that most credit cards come with interest-free days – usually up to 44 or 55. These are periods in your credit card cycle when you can make purchases without being charged interest on them – so long as you don’t already owe money on your credit card.
Spoiler alert:
The interest-free period doesn’t apply from the date of purchase, it instead starts on the first day of your statement period. Learn about interest free days here.
5 – Minimum repayment.
When you receive your monthly credit statement, it’ll likely list your closing balance and your minimum repayment amount. The closing balance is the total of everything you owe, and the minimum repayment is the least you can pay.
Saving tip:
If you can, pay off more than the minimum repayment amount – preferably the full balance. This way you’ll reduce the amount of interest you pay and also help keep you out of excessive debt.
4 – Late payment fee.
This one probably comes as no surprise: if you don’t pay your credit card payment on time, you’ll likely be stung with a late payment fee.
Saving tip:
Simple really – pay on time! Why not set up a direct debit so you never need to worry about missing a payment? Or, if you’re going through financial hardship, call your credit card issuer ahead of time to discuss your circumstances.
7 – International transaction fee.
After your trip abroad you may have brought back some financial souvenirs too.
An international transaction fee is a fee you'll be charged each time you use your credit card overseas. This can quickly add up after paying for hotels, transfers, dining out and shopping. (Those fake ‘Channel’* sunnies may end up costing you more than the real thing.)
However, you don’t always have to be overseas to cop the fee. If you shop online and the merchant is located overseas, you may still be hit with an international transaction fee.
Putting it on a plastic can be an efficient and reliable way to shop – and it doesn’t always mean you’ll be charged interest. By understanding how credit cards work, and familiarising yourself with your credit card terms and any associated fees, you’ll be more in control of your money.
*Chanel
This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.