Did you do an effective cost-benefit analysis before getting your credit cards? If not, read on!

We’re kicking off this week’s feast of finance stories, with Credit Cards. Most people have one or two in their wallet, their pocket (the washing machine? or the freezer!), some people have a lot more than two.

Universally accepted, convenient to carry, it’s now everyone’s “Flexible Friend” the world over especially for the many diffferent kinds of credit card rewards that you can get nowadays. But few people really calculate the personal cost of using a credit card because for most transactions, the actual costs are hidden away in the statement. Rarely do you see the extra cost that credit card transactions incur until you open your credit card statement.

In fact, credit cards can be quite expensive to use. I’ll summarize a list of fees that I’m aware of. I hope my commenters will add others that I don’t list. Are you paying any of these?…

1. Annual Fees
When you apply for your credit card, usually you will face an annual fee. In many cases, these are waived by the issuers, but not always.

2. Cash Advance Fees
When you go to an ATM, you will incur a range of fees, including ATM fees, Cash Advance Fees, and Loan Interest will be charged from the time you borrow the money!

3. Foreign Transaction
These costs (like normal purchase costs) are ‘hidden’ costs, even when you see them on your statement, you’ll notice that the costs are difficult to figure out: they likely include currency transaction fees, as well as additional fees. Typically, these rates are about 3% of the total of each transaction.

4. Interest Payments
Naturally, this is the biggest source of expenditure for most normal users of credit cards. In fact, this blogger was guilty of paying interest fees unnecessarily for six months because I only thought it was $20 or so. What’s the big deal? It was only when I totalled the cost, that I realized how expensive carrying this kind of debt can be. I ended up paying nearly $200 in interest payments that I could have easily avoided.

5. Penalties
Penalties are incurred in a number of horrifying ways, too: Late Fees, Overlimit Fees, and Increased Rates of Interest Payment.

a. Late Fees are usually incurred when the bill is paid late, or the money is received late by the Credit card issuer. Late Fees may be an increased interest rate and/or an actual penalty fee.
b. Overlimit Fees are incurred when you go over the limit of your credit amount. Typically, you can be charged a set amount for each month you are over the limit. This can happen either accidentally or deliberately. For example, when I was in the UK two years ago, I rented a card. I also paid for the flight tickets on my credit card. Of course, this pushed me almost to the limit. I was surprised that I didn’t go over!
c. Increased Rates of Interest can be applied for a number of reasons: nearing or exceeding your limit, decreasing credit score, or late payment on other loans (even with other institutions) or credit cards.

The worst happens when all three of this combine. A late payment may incur a penalty that pushes you over the limit of your credit card, and boom! your interest rate just jumped 3% or 5% or more!

6. Nickel and Dime Charges
Lost statements, replacement cards, convenience checks, are a number of ways that users can find themselves paying through the nose for additional services.

7. The Sell
There are also a bunch of ways that credit card companies can upsell services and products to your credit card: insurance for health, unemployment, life insurance, etc., are amongst a few items that come to mind. Naturally, these are included and can be a great convenience, esp. if they are best of industry products. But choose wisely.

8. The Retailer
There are a number of fees that the retailer must cover when taking credit cards: including set up fees, regular gateway fees, transaction fees (a base fee plus a percentage of the price), and can be as high as 6% for some cards. Most merchants have no real choice but to take credit cards. These costs are of course passed onto customers in higher prices (not just credit card customers, either!). The bookstore I worked in refused to take one particular card for the high cost of its interchange fees, a cost that was invisible to the customer buying the books.

Do the Due Diligence
Naturally, I’m not advising people NOT to have credit cards. Why would I? That’d be silly. In fact, I have two credit cards in my wallet right now. In our credit based societies, developing a credit history is as important as having an ID card or working. But it’s a good idea to compare credit cards carefully, not just the benefits, but also the costs (the apparent and the hiddent one).

For example, if you are looking for a card that can do balance transfers, purchase points, rewards programs or whatever, you need to read the fine print on each agreement. And you need your pocket calculator to work out whether the benefits are as great as they seem!

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