The Real Cost of Owning a Credit Card Over a Year

This is a guest post from Fred who is a personal finance writer at Credit Card Finder. To find out how to guest post on Own The Dollar, check out our guest posting guidelines.

If you look at the interest rate on your credit card or the amount of your monthly repayments, on their own these figures don’t seem to be such a commitment. However, when you look at all the costs associated with your credit card over the course of a year, you might be surprised at how much your card is really costing you. Therefore, take a look at a breakdown of the typical costs of a credit card over an average year, and decide whether your card is really worth it, or whether you could resolve to be more responsible with your credit card this year.

1. Annual Fees. There are many credit cards which have a zero percent annual fee, however credit cards that waive an annual fee also often waive a number of benefits and rewards programs too. Therefore, for comparison’s sake and because most of us are suckers for extras like a gold card, travel insurance, a reward program, or shopping vouchers, we will include an average credit card annual fee of $80 in our cost of a credit card over a year.

Annual fee = $80 / year

2. Merchant Fees. Whenever you use your credit card, your provider is charging the company you are paying a fee to accept your credit card payment. These are known as merchant fees. They are usually around one or two percent, but they can be as high as five percent for cards like American Express. As a result, many merchants will absorb the lower merchant fees of accepting Visa or MasterCard credit cards, but many companies will add a surcharge if you pay with American Express or they will not even accept them. At the same time, some providers such as phone companies or councils will charge a surcharge when you pay your bill with any credit card which is effectively passing the charge back to their customer. So, when you think about the surcharges you are paying throughout the year to use your credit card, the costs can really add up.

For example, if you pay your $200 phone bill using your credit card each month and are charged a 2% surcharge, your credit card is costing you $48 a year in bill payments. If you are then charged a surcharge when merchant fees are passed onto you when you make a purchase, for example a $100 dinner each month and a $100 purchase with your credit card from a small boutique who can’t afford to absorb the cost, at 5% for each purchase your credit card is costing you another $120 a year.

Merchant fees = $168 / year

3. Interest Charges. As much as we try and avoid paying interest and aim to pay down our credit card balances within the interest free days, the average credit card balance is still around $3,700, at an average interest rate of 16%. If you maintain the average credit card balance for a whole year and are disciplined enough not to add to it – but not disciplined enough to pay it down – then your credit card could be costing you $590 in interest. This cost is simply your interest charges for the year. Your credit card is actually costing you over $1,300 in monthly payments, just to pay the minimum balance.

Interest = $590 / year

4. Cash Advances. Just as we aim to pay down our credit card balance, we all know the evils of using the cash advance option on our credit cards. However, in an average year, there are likely to be some cases where you need to make a cash advance from your credit card because your wages haven’t been deposited yet and you need cash for groceries, or you make a transfer from your credit card to your overdrawn checking account so you don’t bounce a bill payment. The average cash advance rate is around 20% regardless of how good the deal is for your purchases interest rate. The cash advance rate is usually much higher, which is why you should also usually try and avoid it. However, if you make one cash advance a month, for $100 at 20% interest, you are paying almost $20 interest each month on your cash advances alone.

Cash advances = $230 / year

5. The Total. The calculations and costs here are average amounts, and your credit card may have a better interest rate or a lower balance. Regardless, it is important that you take away the knowledge and information about the types of additional costs involved in owning a credit card, and how they can really add up over the course of a year.

Total Cost of a Credit Card = $1,068 / year

There is over $1,000 in costs associated with the average household owning a credit card that is before the monthly repayments are even made. Therefore, consider each of these costs as it relates to your situation before you charge your takeaway to credit, or give in to your daughter’s pestering about the shoes she has to have because you need to be sure the benefits and rewards you are getting from your credit card make up for all those trailing costs throughout the year.

Fred is a personal finance writer at Credit Card Finder. He helps people to compare balance transfer credit cards online.