How to understand credit card charges

If you plan to use a credit card, it’s key to understand the different charges you can incur and how you can minimise the cost of using credit. Before you take out a card, make sure that you know the interest rate, fees and charges that may apply.

Interest charges

The interest rate is what a provider charges you when you use your credit card to borrow. If you are unclear about your interest rate, check your credit card statement or contact your lender.

For example, if you have a balance of £100 on a card with 20% APR, it would incur interest of £20 per year.

To avoid paying interest, repay your balance in full every month. If this is not possible, you can pay less by finding a card with a lower APR.

You may also be able to apply for a credit card with an interest free promotional period. During the interest free period, no interest will be charged on the card balance, as long as the minimum payment is paid each month.

Penalty fees for breaking card terms

Missed or late payment charges

Your credit card bill will specify a minimum payment amount and a date you need to make the payment by. If you do not pay by that date, you will be charged a late payment fee (usually £12). If your card issuer charges more than £12, you may be able to reclaim the credit card charges.

To avoid late payment charges, you can set up a direct debit to pay at least the minimum amount every month. This will ensure that you don’t incur any fees or negatively affect your credit score.

Missing a payment can also lead to your provider increasing your interest rate or withdrawing any interest free promotional offer.

How to repay a credit card

Charges for exceeding your credit limit

If you go over your credit limit will be charged a fee which could be around £12.

You can avoid this by checking your limit and current spending by signing in to your online banking or calling your provider.

If you know that you are likely to spend too much before the end of the month, you can ask your provider to increase your credit limit. However, remember to consider how much you can afford to borrow before you increase your limit.

How do credit limits work?

Dormancy fees

Some American Express credit cards and store cards charge an inactivity fee if you go too long without using them, for example more than 12 months.

If you have a card that charges an inactivity fee, consider cancelling it.

How many credit cards should you have?

Standard credit card charges

Cash withdrawals

Although you can withdraw cash using a credit card, it can be an expensive way to access cash so is best avoided where possible. You could face the following charges if you use your credit card to withdraw cash:

• Withdrawal fee: This is usually about 3% of what you take out, although there is usually a minimum fee amount of a few pounds.

• Higher APR: The interest rate charged on cash advances is usually higher than your APR on purchases - often around 27.9% but sometimes much more.

• Daily interest: You will be charged interest on the amount you withdraw straight away.

Here is how to work out if you should withdraw cash using your credit card, and how much it could cost.

Keep in mind that cash withdrawals using your credit card will leave a mark on your credit history and can impact your ability to borrow money in the future. Lenders may consider using a credit card to withdraw money as an indication that you do not have any other access to cash, making you a less attractive borrower.

Balance transfers

Balance transfers can be a helpful way to reduce the cost of your borrowing. However, when you make a balance transfer or money transfer, you will usually have to pay a fee to make the transfer.

This fee is a percentage of the balance you want to transfer. For example, if you transferred £2,000 to a card with a fee of 2.5%, this would cost £50.

Even with the fee, a balance transfer can often You can save money by finding a balance transfer card with a low, or no fee. Here is how to work out which deal will be cheapest.

Spending abroad

You may incur extra fees for purchases made abroad if they are non-sterling transactions. If you use your credit card abroad, it could charge you:

• A loading fee of around 2.99% each time you spend

• The exchange rate, which is likely to be less competitive than most travel money rates

• Interest on the amount withdrawn straight away*

• An ATM withdrawal fee e.g. 3%

*You usually get around 56 days before you are charged interest when you use a credit card for purchases at home

However, cards designed for use abroad can come without fees for spending or withdrawing cash. If you plan to spend money on a credit card abroad, it may be worth exploring credit cards specifically for this purpose.

Here's how to use a credit card abroad

Monthly and annual fees

Some credit cards charge a fixed fee that you have to pay annually or monthly. These fees generally cost from £12 to £150 a year.

If you have a monthly fee, you will pay it off as part of your credit card bill.

For example, if you had a card with a monthly fee of £3 and repaid £50 a month, £3 of this would pay off the fee and £47 would go towards the interest and balance.

Can you get a refund?

If you think you have been charged any fees incorrectly, there are circumstances where you can request a refund. Identify any charges you wish to question and contact your credit card provider immediately to ask for a refund.

Here is how to reclaim your credit card charges