The average American has between 5 and 10 credit cards. That equals 5 to 10 different monthly payments, in addition to your rent, food, utilities and other payments. IN addition to those monthly payments, you are also paying interest on the account balance. Whether you are aware of it or not, you are most likely paying other fees in addition to the interest rate. In some cases, you may be able to avoid additional fees if you pay attention.
Common Credit Card Fees
An annual fee is just that – a yearly fee for using the credit card. While not all credit cards come with annual fees, those that do tend to offer benefits such as travel or other cashback or reward programs. In some cases, an annual fee may be worth the extra expense, but you have to look at the details of the specific offer or your current card to see how you can take advantage of the annual fee. If you can use the rewards to get money back, the annual fee may pay for itself.
Depending on your specific card, you will have to calculate the amount you get back in rewards to determine if the annual fee is worth the expense. There are cards with no associated annual fee, so you can always choose that option if you don’t want to do the math.
Balance Transfer Fees
It may sound good to transfer all your credit card debt into one account, especially with a 0% interest rate. However, a balance transfer can end up costing you more money due to loan fees and a high interest rate after the introductory period expires. Most companies charge between 2 to 5% of the loan fee, and the interest rate can be up to 25% after the 0% rate expires. This is how you can end up paying more than your initial debt if you consolidate your credit cards into one with a balance transfer.
If you have a low credit score, chances are you can still be approved for a balance transfer, but you should only use this option if you have a plan to repay all or most of the balance before the 0% introductory period has expired. It is also important to read the details of the balance transfer agreement, so you know what the interest rate will be after the introductory period. You will have to do some calculations to determine of a balance transfer will allow you to avoid extra fees or end up costing you more in the long run.
Using a Cash Advance Option
Most credit cards have cash advance options, which allow you to withdraw cash against your credit line. While this may sound like a great option, cash advances typically come with extremely high interest rates, plus additional fees. You may be charged between 2 to 5% of the cash advance amount, and you may have to pay a higher interest rate on that amount. Before you decide to use a cash advance with your credit card, be sure to understand the associated fees and charges.
Interest Rate or Finance Charges
The best way to use a credit card is to pay the balance in full each month, so you avoid paying finance charges. This is difficult for many people. If you are not able to pay the balance each month, be sure you are paying the lowest interest rate possible. In most cases, cards that offer rewards have a higher annual percentage rate (APR), so pay attention to the details of the card you choose.
Late Payment Fees
If you miss a credit card payment, you will be charged a late fee, typically between $30 and $40. In addition, your interest rate may go up, which will increase the monthly payment amount until you reduce your balance. You will end up paying more money in interest after your rate has been increased. In most cases, you will have to pay the late fee with your next monthly payment, unless you choose to pay it before then. Making continuous late payments or paying more than 30 days late can negatively affect your credit score.
Exceeding Your Credit Limit
If you go over your established credit limit, in most cases you will be charged an over-limit fee. Your interest rate may go up in this case as well. Some cards do offer options to have a purchase declined if it puts you over your limit, which can prevent the additional fee. The best way to avoid exceeding your limit is to maintain a balance well below the limit.
If you are getting close to your credit limit, you should make an attempt to pay more than the minimum monthly payment and stop using the card so you can reduce the balance. You may also want to contact the creditor to negotiate a payment plan which may reduce the over-limit fees.
Insufficient Funds or Returned Payment Fee
If your check is returned due to insufficient funds or an electronic transaction cannot be completed, you will be charged an additional fee. An insufficient funds fee is typically between $30 and $40, and you will also be charged a late payment fee unless you have the funds available before the due date.
Credit Card Consolidation
While a balance transfer may be one way to consolidate your credit cards, you may also consider getting a loan to pay off your credit cards. This will allow you to pay off your balances and make one monthly payment to the lender, instead of making multiple payments to each of your creditors. Although a credit card consolidation loan can be helpful for some, others end up in a deeper financial hole than when they began.
Examine Your Finances
If you are overwhelmed with debt or have multiple credit card accounts with balances near the limit, you will have to examine your finances to see where you can make cuts in order to live without using credit cards. Credit card consolidation will not be beneficial unless you reduce your spending and live off only your income.
It is also important to write down all your debts and the interest rates, so you know which have the highest rates. You will want to make sure these debts are reduced, because they are costing you the most money in interest rate charges.
Debt Consolidation Loans
If you are struggling to make the minimum monthly payments on multiple credit cards, you may want to consider a debt consolidation loan, which includes credit cards, medical bills and other unsecured debts. If you decide to pursue this type of loan, it is important to be aware of the details before you sign any loan agreement.
Successful use of a debt consolidation loan depends on several factors: the interest rate of the loan, the loan term, additional fees, debt requirements and the amount of debt consolidated.
To benefit from a debt consolidation loan, the interest must be lower than the interest rates you are currently being charged on your credit card balances. Some debt consolidation loans may offer an introductory period with a low interest rate similar to a balance transfer offer. When the introductory period expires, the interest rate will increase.
Although your monthly payment may be lower than what you are currently paying, a debt consolidation loan may still cost you more in the long term. For example, if the loan term is 5 years, you may end up paying more in interest over the loan term. The lower monthly payment may be a short-term relief, but you may be causing more damage to your finances in the future.
Most debt consolidation loans also come with a loan fee. The loan fee is typically 2% to 5% of the loan amount. In some cases, you may also be charged a transaction fee or a verification fee as well. This fee can add a significant amount to your loan, and it is costing you more than just paying your credit card bills on your own. Based on your financial situation, you will have to do some calculations to determine of a debt consolidation loan is your best option.
Some companies may only offer a debt consolidation loan if your accounts are considered delinquent. Obviously, if you choose this route and become delinquent on your accounts, this will damage your credit score. In addition, the debt consolidation company may be responsible for making the payments to your accounts on your behalf. If the agency or organization fails to make the payments or makes the payment late, you are held responsible.
Some debt consolidation lenders will require that you close your accounts, which will also negatively affect your credit score. Others may allow you to keep the accounts open, which won’t damage your score at all, although you may be tempted to use the open accounts.
The Loan Amount
For a debt consolidation loan to work, you will need a large enough loan amount to cover all of your credit card debt. If you cannot get enough to cover all your debt, it will be extremely difficult to manage your outstanding debt in addition to the consolidation loan. You will want to include your high interest debts and any medical bills or other unsecured debts.
Get the Best Deal
First, be sure to use a reputable lender. There are many legitimate lenders online and in physical store locations. Most lenders will be licensed or accredited by the Better Business Bureau (BBB). Be sure to do some research before you choose a lender.
You should try to find 2 or 3 reputable lenders who offer debt consolidation loans so you can compare the offers. Based on the interest rate, loan term and loan fees, you should be able to find the best deal for your situation. If you have a low credit score, you may have more limited options, although there are several lenders who will consider applicants with bad or poor credit. In this case, be prepared to pay a higher interest rate on your loan.
Before you sign for a debt consolidation loan, you should read the agreement and understand all the terms. Prior to pursuing the loan, calculate the monthly payments of the loan to determine if you will be saving any money. Be sure to include the loan term so you know how much you will paying over the entire loan period.
Develop a Financial Plan
Avoiding additional credit card fees can save you hundreds of dollars per year. If you use your credit responsibly, a credit card can be a good resource to use in a financial emergency or when you are faced with unexpected expenses. There are many cards with low interest rates, in addition to cards with rewards programs which some consumers find beneficial.
If you struggle to keep your credit card balances below the maximum limit or you have multiple credit card accounts, you may want to consider developing a budget in order to reduce your debts before it becomes overwhelming. It can be tempting to use a credit card for unnecessary expenses, which can cause severe damage to your finances and your credit score.
A debt consolidation loan may be a good option if you are having difficulty making the minimum monthly payments on your credit cards, or if you have exceeded your credit limit and are unable to get it back below the line. A credit counselor is a great resource to use if you find yourself considering consolidating your debt.
Credit counselors typically work for non-profit credit agencies, and they can help you analyze your finances and provide recommendations for reducing or eliminating your debt. There are many options other than debt consolidation loans, such as debt management or debt settlement plans. In any case, the credit counselor is a professional who has experience with finances, budgeting and debt consolidation, and they can help you decide the best path for you to take to become debt-free.
Financial Advisor, DCL
Claire is a noted financial writer and author of hundreds of articles about personal and business finance. Before getting her MBA, she graduated with a BS in Economics. Her coursework focused on the different ways that debt, debt structure, and debt restructuring affect micro and macro-economic issues.
Upon graduation, she took a job at an investment bank that worked with municipal and county governments to help them reorganize and structure their debt so they could continue to provide essential city services.
Get out of Debt Today