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Credit card fees and interest rates determine your true cost of borrowing. In the past decade, regulatory and market changes have impacted those costs.
The Credit CARD Act of 2009 set limits on rate increases, and on fees that could be charged to credit card holders. The card industry changed in response to the law: Instead of offering low rates upfront with big back-end rate hikes, it became more transparent and set truer upfront rates. That has resulted in slightly higher initial rates for consumers, but fewer surprise punitive fees and rate hikes.
According to the U.S. Consumer Financial Protection Bureau Consumer Credit Card Market Report 2017, accounts that carry a balance pay the majority of fees and interest on credit cards. Not only do they pay almost all interest charges, they also incur more than 70 percent of fees.
According to Federal Reserve Board, Report on the Economic Well Being of U.S. Households in 2017, 83 percent of U.S. adults have at least one credit card, of whom about 27 percent carried a balance most or all of the time, meaning they regularly paid interest. Another 21 percent carried a balance some of the time. Forty-five percent never carried a balance. At the household level, the Fed Survey of Consumer Finances found that 44 percent of families had credit card balances in 2016.
An Aug. 2017 fee survey by CreditCards.com found that the average credit card has six fees associated with it. Late fees are the most common, followed by cash advance fees, returned payment fees and balance transfer fees.
Fees are the second-largest cost to consumers from credit cards, after interest, according to the CFPB report. Altogether, fees make up nearly one-fifth of consumer costs. Total fees as a percent of account balances were below 3 percent in 2016.
Total fees as percentage of annualized balance, for accounts that carry a balance
Late payment fee: Federal regulation sets limits on credit card late fees. The maximum late fee that can be charged on the first delinquency is $27 in 2018. The maximum late fee on subsequent delinquencies is $38. The amounts can be adjusted annually for inflation, but remained the same as in 2017.
Card issuers can charge less than the maximum. Many keep the $25 maximum set by the CARD Act, making the regulatory figure the typical late fee, according to banks’ terms and conditions published by the Consumer Financial Protection Bureau.
Annual fees ranged from$25 to $450. Only 24 of the 100 cards surveyed by CreditCards.com in Aug. 2017 charged an annual fee. And nine of those will reduce or waive the fee in the first year of the account for new cardholders. Higher fees generally function as payment for lucrative reward programs, the CFPB report said.
According to the consumer bureau’s report, late fees remained the costliest fee for consumers, especially in private label cards, such as store and gas cards. The figure shows the share of total fees attributed to each fee type for private label cards and general purpose cards.
Fees on private label card accounts amounted to 5.8 percent of balances overall, while fees on general purpose cards were 1.8 percent.
Type of fee as percent of total fees paid
Cash advance fees: According to credit card terms and conditions filed at the CFPB, the typical cash-advance fee is 2 percent to 4 percent of the amount of the advance. A minimum charge of $5 or $10 is common.
Debt suspension fee: Known as payment protection, debt protection or debt cancellation plans, these fees are growing less widespread in the card market, and less burdensome to cardholders. Before the 2009 CARD Act, one of five accounts incurred the fee quarterly, falling to one in 17 accounts by 2015. In 2016 the incidence of the fees continued to decline from 5.8 percent of general purpose fees charged to 3.3 percent. According to a 2011 Government Accountability Office report, fees for debt protection programs ranged from 85 cents to $1.35 per month for every $100 of balance.
The impact of interest
Average APR for open, non-promotional accounts
For consumers who carry a balance, interest can be expensive. The average annual percentage rate (APR) on a credit card with a balance was 15.54 percent in May 2018, according to the Federal Reserve Consumer Credit Report. That means a $5,000 balance with that rate could cost you a $78 a year in interest alone. The average APR for all cards, including those that do not carry a balance, was 14.14 percent in May 2018.
For new card offers tracked by CreditCards.com’s weekly rate survey, the average APR on the 100 most popular credit cards (not just accounts assessed interest) rose to a record average of 17.03 percent in August 2018. Business credit cards have lower rates. The average APR on a business card was 14.59 percent. New student-oriented card offers averaged 16.48 percent APR.
Credit card APRs have been creeping up since the Federal Reserve started raising the benchmark federal funds rate in December 2015.
Most cards have variable APRs that are pegged to banks’ prime rate. And banks set their prime in step with changes in the federal funds rate.
Students and cards
According to Student Monitor’s Spring 2018 Financial Services report:
- 35 percent of four-year, full-time U.S. undergraduates have a Visa, Mastercard, American Express or Discover card account in their own name.
- The average APR for those who say they know their APR is 8 percent.
- Of the 35 percent fraction of undergrads who have cards, 20 percent say they have been charged with a late fee.
Creditcards.com 2017 Credit Card Fee Survey
CreditCards.com weekly rate survey
Federal Reserve Report on Economic Well-Being of U.S. Households in 2017
Federal Reserve Survey of Consumer Finances
GAO Report to Congressional Committees, March 2011
Student Monitor LLC
U.S. Consumer Financial Protection Bureau Consumer Credit Card Market Report 2017