How Do Credit Cards Really Work?

Understand credit card fees so you can avoid paying them.

Laura Adams, MBA
5-minute read
Episode #248

What is a Balance Transfer Credit Card?

One of the biggest myths about using a credit card is that you have to carry some amount of debt to build credit.

I mentioned a special type of credit card that’s called a balance transfer card. They offer low or no interest during a promotional period if you pay down another account—like a credit card or an installment loan—and move all or a portion of your balance to the credit card account.

A typical balance transfer promotion might last from 6 to 24 months after you make a transfer and then the interest rate can increase dramatically. You still have to make a minimum payment during the promotional period each month and each amount you transfer is subject to one-time fee that typically ranges from 3% to 5%.

Here’s an example of a good way to use a balance transfer card: Let’s say you got a car loan a few years ago with a high 17% interest rate because your credit score wasn’t as good as it is today. Your monthly loan payment is $500 and you have about $8,000 left to pay on the car over the next 18 months.

If you transfer your loan balance to a card that offers 0% interest for 18 months and charges a 3% transfer fee, you’ll come out ahead. If you pay $440 per month to the card during the 18-month promotional period, you’d keep the car’s original payoff schedule and save over $1,000 in interest!

Here are a few top balance transfer cards to check out:

Read Should You Use a Balance Transfer Card? for more information. Also, use the online balance transfer calculators at smartbalancetransfers.com and bankrate.com to find out whether doing a balance transfer can save you money.

What Fees Can a Credit Card Charge?

Besides finance charges, there are other ways that credit cards make money. If you mess up and pay your bill late, you’ll be charged a fee as high as $25. If you pay late more than once over a 6-month period, the fee can go up. Additionally, once you’re 60 days late paying your bill, a card company can hike your interest rate.

Another fee to avoid is called an over-limit fee. If you authorize your card company to allow transactions that exceed your credit limit, they’ll process the charges but also penalize you as much as 29.99%. Otherwise, a transaction that would exceed your credit limit will be turned down.

Many cards, especially those that offer cash back or travel rewards, charge an annual fee. If you utilize rewards that are worth more than the annual fee, it may be a worthwhile expense—otherwise opt for a card that doesn’t charge one.

How to Monitor Your Credit Card Account

When you use a credit card, it’s really important to monitor the activity on your account. Always keep your credit card receipts so you can match them against your statement. If you find anything that’s incorrect, contact the card company right away to resolve the issue. They can open an investigation with a merchant who charged you for something you want to dispute.

Be sure you understand what interest rates you’re paying for every credit account you own. Using credit responsibly includes taking the time to go over each statement with a microscope so you watch out for fraudulent charges, fees, or unexpected changes in your interest rate.

Download FREE chapters of Money Girl’s Smart Moves to Grow Rich

Need some help with your New Year’s financial resolutions? Just grab a copy of my book Money Girl’s Smart Moves to Grow Rich. It tells you what you need to know about money without bogging you down with what you don’t. It’s available at your favorite book store in print or as an e-book for your Kindle, Nook, iPad, PC, Mac, or smart phone. You can even download 2 free book chapters at SmartMovesToGrowRich.com!

Get More Money Girl!

There’s a huge archive of past articles and podcasts if you enter a topic in the search bar at the top of the page. Connect with me and learn more about money here:

More Resources:
Credit Score Survival Kit – a free multimedia resource
How to Pay Off Credit Card Debt – Podcast Episode 145
How to Raise Your Credit Score Fast – Podcast Episode 164
Image courtesy of Shutterstock


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.