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No-Fee Credit Cards: Too Good to Be True?

[Thursday, June 6th, 2013]

Anyone who has ever used a credit card knows that the biggest thing to watch out for is fees.

Whether a payment got hung up in the mail, a purchase accidentally pushed the card balance over the credit limit, or the card came with an unanticipated annual fee, most of us have been slapped with a charge we did not expect at some point in our credit card-carrying lives.

But a new category of credit cards is promising to change all that. Cards like Citi Simplicity and Discover it market themselves as “no-fee” credit cards. They have no annual fee and do not charge a late payment fee or an over-the-limit fee. But are these fee-free cards too good to be true?

Here is a closer look at some of the fees that credit cards do (and don’t) charge, including these new “no-fee” credit cards.

  • Annual fee – many cards do not charge annual fees, but those that do often come with rewards and benefits that make the fees worthwhile. Travel cards in particular tend to charge annual fees, but in exchange, they give big sign-on bonuses like free flights and hotel rooms. They also offer perks like 24/7 concierge service, travel insurance and purchase protection that can make an annual fee well worth the money. Look for cards that come in two varieties – regular and “preferred.” The preferred version usually has an annual fee, while the regular card does not.
  • Late fee – The latest trend is for credit cards to waive late payment fees, which are normally around $35. However, don’t get too comfortable about paying your bill late: Discover it, for example, doesn’t charge a late fee the first time you pay late — but the second time (and every time after that), you’ll be charged the full late fee of $35. And if you bounce a check when you pay, you will still pay a returned check fee of $35. Paying late can also negatively impact your credit report, whether or not your card issuer charges you for it.
  • Over-the-limit fee – Just like with late fees, going over your credit limit can still be bad for your credit score. Even if you are not charged a fee for it, you will be using more credit than your available credit. To keep your credit score in top shape, the rule of thumb is not to use more than 30% of your available credit. That means if your credit limit is $5,000, you should try to keep your balance under $1,500. Using that guideline, you should never even be close to worrying about incurring an over-the-limit fee.
  • Foreign transaction fee–Watch out for this one. Citi Simplicity bills itself as fee-free, but they charge 3% for purchases made out of the United States. Discover it, however, does not charge a foreign transaction fee, and neither do any of their other cards. Capital One has also removed foreign transaction fees from their products across the board. If you travel overseas frequently, be sure to look for a card that doesn’t charge this fee, which is usually between 1.5% and 3%.

Whatever card you carry, you can usually avoid fees by keeping the terms of your cardholder agreement. Set up automatic payments so you don’t miss a due date, stay well under you credit limit, and you shouldn’t have any rude surprises when you open your monthly credit card statement.

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