Most people have a reflexive aversion to paying fees, especially if there are any alternatives to doing so. But sometimes fees can be your financial friends, because they deliver benefits that exceed their cost.
Credit cards are a perfect example of how avoiding fees at all costs may in fact cost you dearly, because they subject you to other charges or higher interest rates than you might enjoy by swallowing the charge.
Here’s a list of a few such fees that you may want to think twice about the next time you sign up for a credit card.
Annual Fees
Paying every year to simply use a credit card simply feels wrong to some consumers. True, you should never sign up for a card that charges a fee without doing the math on its benefits; some cards offer some people little that justifies the expense of paying for their use. But automatically filtering out cards that charge a fee can be just as bad. It’s true that, for some individuals, no-annual-fee credit cards can provide the best rewards and lowest interest rates. However, by completely ruling out a whole set of cards, you’re potentially turning a blind eye to options that could provide you with much better results.
This point can be best understood by looking at a specific example. One no-annual-fee card may give you 1%, while another may charge $50 per year while awarding 2% back. If you’re someone who charges over $12,000 per year on their credit card, paying the annual fee will leave you with the most money in your pocket, even if you take away what you’d be paying towards the annual fee. This is why you need to always consider your net rewards, and not rule out the annual fee. If the person in the above example blindly filtered out the annual fee card, they would be losing $70 per year.
This isn’t to say all cards work like this. There are some cards that charge annual fees and don’t provide you with that much more in terms of rewards or benefits. The lesson here is that consumers should be mindful of this give-and-take relationship.
Balance Transfer Fees
Whenever you move your credit card debt from one credit card to another, your financial institution will charge you anywhere between 3% to 5% of the total amount you’re transferring. This is what’s commonly referred to as ‘balance transfer fee’. Though at first glance it may seem like your bank is gouging you for fees, this doesn’t mean you have to be at a net loss. Once again, you should consider the give-and-take relationship surrounding these charges.
You can transfer your balance from a high-interest to a low-interest one. If you manage to do that, you can end up saving money over the long run. By the time you’re finished paying off your debt, the one-time 3% or 5% balance transfer fee may seem like a speck of dust next to the mountain of interest charges you saved.
This is doubly true if you can qualify for a credit card that also offers a zero percent interest rate. Some cards are specifically designed to help you pay down credit card debt by offering this special financing. These so-called balance transfer credit cards provide users with 0% APR for periods as long as 24 months. Paying a transfer fee on these cards is often a no-brainer. Most people who can completely bypass interest for even a few months will have more than made up the cost of the transfer charge.
Foreign Transaction Fees
Anyone who’s visited currency exchange kiosks abroad has seen their fair share of bad exchange rates. Some may even seem like highway robbery. If you’ve ever begrudgingly bought currency at a bad price because you found yourself in a pinch, you should know that credit cards could be a good alternative. You just need to be willing to pay the foreign transaction fee.
Most cards charge their users 3% on top of any transaction that passes through a foreign bank. The 3% is charged after the currency is converted to USD by your card network – Visa, Mastercard, American Express or Discover. These companies generally select fair exchange rates that are close to the actual exchange rate. If your only other option is a currency exchange kiosk that is charging a markup greater than 3%, you should gladly use your credit card and pay the foreign transaction fee. Though neither situation seems ideal, you’ll be saving the most money by using your credit card.
Note that if you find the right travel rewards credit card, you can have your foreign transaction fees waived completely. This is always the best solution and it’s why you should always ask your issuer about the foreign transaction fees on any of the credit cards you own, before you travel.
Credit Cards
Nasdaq/GettyImages-578294378