Susan Hume, Associate Professor of Finance, was featured as an expert in a recent article on WalletHub discussing “Credit Card Fees.”
Do you have any tips for avoiding credit card fees?
Let’s consider the factors that affect these fees. Fees are influenced by the credit card benefits, the rewards offered, and your credit score. This discussion is focused for those with good credit (640 – and higher).
The answer may depend – Are you trying to build your credit or perhaps you are looking for a basic cash back credit card, then choose a credit card with no fees. I like to think of a no-fee card as the card to use every day. When building credit, the no-fees option will give you a flat rewards rate, which is especially useful for necessities purchases. Examine whether you expect to dine out a lot, then you may favor a card with graduated payment benefits compared with a flat rate benefits card for little entertainment expenses.
Cards with moderate perks have fees ranging from $95 to $200 annually.
Cards with premium perks may have airport lounge access, travel credits, travel and trip insurances. These come with premium fees – $400 to $695.
What advice do you have for someone who isn’t sure whether it makes sense to pay an annual fee to get a credit card with better perks?
Make a chart to compare what you will earn in rewards for a credit card with vs. without an annual fee. This will help you decide. It all depends upon your total expected purchases and the cash-back rewards.
For example, consider a no-fee credit card and a 2% cash-back reward. If you have annual purchases of $10,000, you will earn $200 in rewards. Compare this with a $95 fee with a higher 3% cash back. In this fee case, you will receive slightly more – about $205 after you pay the annual fee. If you have more than $10,000 in annual purchases, then it may be worthwhile to have the moderate annual fee card expense.
Be sure to review your card annually as the fee and rewards may change.
Which do you think people should watch out for more: credit card fees or interest charges?
With a credit card rewards program, it’s important to keep your expenses in line and pay off the card monthly. Credit card fees are high-interest rate borrowings (can be 25% APR) that quickly add up when you carry an unpaid balance. It is easy to overextend your purchases above your income when using a credit card. Live modestly, make a list of necessary purchases and consider making a list of whether you need to make a purchase – hold off for 3 days and revisit whether you still need the product. It’s better to limit spending and keep it in line with your ability to make the payments.