Understanding Credit Card Costs: Fees for Issuers and Consumers

Credit card usage involves many costs, from the issuer creating the card all the way down to the consumer who presents it as a form of payment. While marketed as a convenience item for users, credit cards ultimately are intended to turn a profit for issuers, after taking into account all the fees involved in creating the card.

Issuer Costs

To draw customers to a card, an issuer needs to market it. Major credit card companies spend hundreds of millions of dollars per year on marketing cards to potential customers, from brochures in banks to multimillion-dollar Super Bowl commercials. On top of direct marketing costs, issuers have to spend money on the research and development of new cards, the physical processing of cards and the staff to support all of these activities. As rewards cards have boomed, issuers have faced additional costs to provide card benefits, ranging from annual airline fee credits and mileage points to cash back on customer purchases. Fraud detection and prevention has also become a major expense, as federal law limits consumer liability for fraudulent purchases to $50 and most major card issuers generally drop that liability to zero.

Merchant Costs

Many merchants accept credit cards to attract more customers and make more sales. Merchants that accept credit cards have to pay for that benefit. Typical merchant fees run from 2 to 3 percent of the transaction amount. Card issuers also may charge merchants additional fees, such as network authorization fees or card-not-present surcharges. Businesses also might have to meet a minimum revenue requirement to qualify or maintain a card, such as $10,000 in monthly sales. Some merchants help defray those costs by passing them on directly to consumers.

User Costs

As a customer, you may face a wide variety of fees for using a credit card. Some cards charge an annual fee. These often are levied by issuers that offer extensive services, such as a platinum card that gives airline fee rebates. Other issuers charge fees to high-risk customers, such as those with bad credit or who have recently filed bankruptcy, in order to protect themselves in case of loss.

Tip

Just because a card charges a fee doesn't make it a bad choice. Evaluate the benefits a card offers to see if the fee is justified.

Most credit cards charge high interest rates for customers who carry a balance from month to month. In many cases, these rates can exceed 20 percent annually. While typically you have a one-month grace period before interest charges accrue to your purchases, if you take a cash advance on your card you'll get hit with interest immediately. The good news is that you can avoid these charges if you simply pay your balance in full every month and avoid using your credit card like an ATM card.

Warning

Credit card interest can accumulate rapidly if you don't pay it off. For example, a card with an interest rate of 24 percent could double your total balance in as little as three years.

A host of other fees and charges are attached to most credit cards, but you're unlikely to face them if you handle your credit responsibly. For example, most cards charge an over-the-limit fee if you make charges above your allowable spend, and most also levy late charges if you don't make your payment in time.