What are the Costs Involved in Using a Credit Card?

Credit cards can be useful financial tools that unlock convenience, rewards, and opportunities to build credit. But every benefit comes with potential costs. Understanding those costs upfront can help you avoid unnecessary fees and make smarter financial decisions.

Most credit card expenses fall into a few key categories: interest charges, annual fees, optional service fees, and penalty fees. Some costs depend on how you use your card, while others apply automatically just for having the account.

This guide provides a closer look at how these expenses show up in real life. These details can help you manage your accounts and control how much credit cards ultimately cost you.

1. Interest charges: The real cost of credit cards

For many people, interest represents the most expensive cost of using a credit card. It’s best to repay your full credit card balance every month, but many people carry debt. The average credit card balance in the United States is over $6,700 as of mid 2025, according to Experian data.^[1]

When you carry a balance from one billing cycle to the next, your card issuer charges interest based on the annual percentage rate (APR) on your account. The average credit card APR sits just above 21% as of early 2026, according to Federal Reserve data.^[2] At that level, even a modest balance can grow quickly when you make only minimum payments.

How interest adds up

Credit card interest compounds daily in most cases.^[3] This detail might sound small, but it can have a big financial impact. Your credit card balance grows a little more every day you carry it.

Your card issuer’s minimum payment formula also affects how quickly you pay off debt and how much interest you pay. Here are two simplified examples based on a $6,700 balance at a 21% APR.

Source: Calculator.net ^[4]

These examples show how different minimum payment formulas can lead to very different interest costs. Lower minimum payments can reduce your monthly burden but extend your repayment timeline and increase total interest costs.

Paying only the minimum payment isn’t a strong long-term strategy, even though it keeps your account current. Treat the minimum payment as a safety net, not a goal. Paying more toward your balance helps you reduce interest costs and get out of debt faster. The best way to manage a credit card account is to repay your full statement balance every month.

Carrying a balance on your credit card account can also increase your credit utilization ratio. (Credit utilization is the relationship between your credit card limits and balances.) A high credit utilization ratio can damage your credit score since this factor makes up about 30% of your FICO® Score.^[5]

How to avoid interest

You can avoid credit card interest entirely by paying your statement balance in full each month. This approach lets you use your card and build credit without paying extra interest.

2. Annual fees

Annual fees represent a fixed cost you may pay just for having certain credit cards. Some cards feature no annual fees, but others charge $95, $250, or even over $500 per year depending on the account benefits.

In general, credit cards that charge annual fees fall into one of the following categories:

• Rewards credit cards: These accounts often come with annual fees because they offer extra value, such as higher cash back rates, travel rewards, statement credits, or premium perks. They tend to work best for people with good credit who spend more or travel frequently.
• Credit cards for bad credit: These cards may feature annual fees because lenders take on more risk when approving applicants with lower credit scores. For example, in a 2025 CFPB analysis of Buy Now Pay Later (BNPL) short term loans, borrowers with deep subprime scores defaulted five times more often than prime borrowers.^[6] Many of these accounts include secured credit cards, like the Self Visa® Credit Card ,which require a refundable security deposit* and can help you build credit over time.

When annual fees make sense

Depending on your credit score and preferences, you may be able to avoid annual fees by choosing the right card. But a card with an annual fee could be worthwhile if the benefits outweigh the costs.

For example, many travel rewards credit cards offer statement credits, bonus category rewards, and high-value perks. Those benefits could easily offset a moderate or even expensive annual fee if you use those features on a regular basis.

When annual fees become a cost burden

Of course, it’s important to remember that annual fees are not always worthwhile. If you stop using a credit card’s benefits, the annual fee becomes a pure expense.

You should take time to review your credit card accounts each year. Evaluate the benefits each card offers and see if there are any upcoming changes to the cardholder rewards program. If a card with an annual fee no longer delivers value, consider making changes.

Unfortunately, closing a credit card could damage your credit score—especially if you carry balances on any of your current accounts.^[7] So if you no longer want to keep a card with an annual fee, the options below may help.

Instead of closing your account you could try to:

• Switch the account to a no-annual-fee credit card with the same issuer (if available and you’re eligible).
• Ask the issuer if it’s willing to waive your annual fee as a one-time courtesy.

If you decide to close a credit card, it may be helpful to:

• Request a credit limit transfer from the account you’re closing to another card you already have open with the same issuer.
• Pay down your credit card balances first to avoid any credit utilization increase after the account closure.

3. Optional service costs

Optional costs show up when you use certain credit card features. These charges aren’t automatic, so you can often avoid them with strategic choices.

Common optional costs

Balance transfer fees

Balance transfers can be a good way to consolidate high-interest debt, take advantage of a lower promotional interest rate, and possibly improve your credit. But many card issuers charge a fee of 3% to 5% (or $5 to $10 minimum) of the transferred balance for this service.^[8] You may also need to build good credit before you’re eligible to open a credit card that offers balance transfer promotions.

Balance transfer costs can reduce your savings, especially if you plan to pay off the debt quickly. However, if you need time to pay back your credit card debt, a 0% APR or low-interest balance transfer offer could save you money despite the fee. In general, it’s wise to do the math upfront to calculate the cost of a balance transfer and come up with a plan to repay your debt before the promotional APR period ends.

Cash advance fees

A cash advance can help you withdraw cash from your credit card account instead of using the account for traditional purchases. However, cash advances are typically expensive because they come with multiple layers of costs.

First, most issuers charge a cash advance fee of around 5% of the transaction amount or a $10 minimum—whichever is greater. On top of that, the APR for cash advances is often higher than your standard purchase APR. Cash advances also typically don’t come with a grace period, so interest starts accruing right away, even if you repay your full balance by the next due date.^[9]

Because of these combined costs, cash advances can be one of the most expensive ways to borrow money. In most cases, it’s better to consider alternatives like building an emergency fund, a paycheck advance, or exploring lower-cost borrowing options.

Foreign transaction fees

Foreign transaction fees come into play when you make a purchase outside of the United States. Card issuers typically charge between 1% and 3% of each transaction.

You can trigger this cost without leaving the country. If a foreign bank processes your payment, your issuer may charge a fee even when you pay in U.S. dollars, like when you shop with international retailers online.^[10] Many cardholders don’t expect that extra cost.

Many credit cards, especially travel rewards cards, waive foreign transaction fees. If you make frequent international purchases, keep these details in mind when you choose a credit card account.

Authorized user fees

Some credit card issuers charge a fee when you add an authorized user to your account. These fees can range from $0 to $75 or more, depending on the card.^[11]

Adding an authorized user can help someone build credit or make it easier to share expenses. But you should also consider the potential drawbacks of adding an authorized user, especially if the account charges a fee, before moving forward.

4. Penalty costs

Penalty costs show up when something goes wrong with your credit card account. These charges can feel frustrating, but you can usually avoid them with a few simple habits.

Late payment fees

Late credit card payments can cost you in more ways than one. If you miss your due date or pay less than your minimum payment, late payment fees could reach $30 or more depending on the issuer.^[12]

Late payments can also hurt your credit score. Payment history makes up 35% of your FICO® Score, and a missed payment can stay on your credit report for up to seven years.^[13] Staying current on payments, even at the minimum level, helps protect your credit.

Returned payment fees

Returned payment fees happen when your payment doesn’t go through, often because your bank account doesn’t have enough money. Your card issuer may charge a fee of up to $40 when this happens.^[14] At the same time, your bank might also charge an overdraft or insufficient funds fee. That combination can turn a simple mistake into an expensive setback.

Keeping a small cushion in your checking account can help reduce this risk. It’s also wise to review your bank balance regularly and follow a budget to limit potential issues.

Over-the-limit costs

Over-the-limit fees are less common today, but they can still happen in certain situations. In the past, card issuers regularly charged fees when you went over your credit limit. Today, credit card companies must get your permission first.

Fee amounts vary, but they can’t be larger than the amount you charged above your credit limit. Some issuers, however, no longer charge this type of fee at all.

Even without a fee, going over your limit can still cause problems. It may lead to declined transactions or hurt your credit score if your balance remains too high for a long period. In some cases, repeated over-the-limit activity could lead to account closure.^[15]

How to avoid credit card costs

You can avoid many credit card costs with a few simple steps. You don’t need a perfect system to get started. Small, consistent steps can make a big difference over time.

1. Pay your balance in full whenever possible

Paying your full statement balance each month helps you avoid interest charges completely. This approach can save money and protect your credit.

2. Always pay at least the minimum payment on time

Paying at least the minimum amount due on time is essential if you use a credit card. On-time payments help you avoid late fees, keep your account in good standing, and protect your credit score. Missing a due date, however, can lead to added costs and long-term credit damage.

3. Be careful with high-cost features

Some credit card features, like cash advances and balance transfers, can increase your costs quickly. Understand the terms and costs of any credit card benefit before using it.

4. Choose a card that fits your situation

The right credit card can help you avoid unnecessary costs from the start. Depending on your goals, it might make more sense to apply for a credit card with no annual fee or one designed to help you build credit. If you’re working on your credit, look for an account with simple terms and manageable costs so you can stay on track without added financial pressure.

Final thoughts

Credit cards can cost more than you expect if you don’t understand how they work. But once you know where different credit card expenses come from, you can take steps to avoid many of them. Interest, annual fees, optional costs, and penalty charges all play a role in the price you pay to use a credit card.

The good news is that most of these costs stay within your control. With the right approach, you can build credit, manage expenses, and even earn rewards without paying more than necessary.

*Secured Self Visa® Credit Card deposits are returned upon account closure after settling outstanding balances.

Sources

1. Experian.com. “Average Credit Card Debt by Age in 2025.” https://www.experian.com/blogs/ask-experian/research/credit-card-debt-by-age/
2. FederalReserve.gov. “Consumer Credit.” https://www.federalreserve.gov/releases/g19/current/
3. Experian.com. “Is Credit Card Interest Compounded Daily?” https://www.experian.com/blogs/ask-experian/is-credit-card-interest-compounded-daily/
4. Calculator.net. “Credit Card Calculator.” https://www.calculator.net/credit-card-calculator.html?balance=6%2C700&rate=21&payoffoption=1&fixedpaymentamount=134.00&year=2&month=0&x=Calculate
5. myFICO.com. “What Is Amounts Owed?” https://www.myfico.com/credit-education/credit-scores/amount-of-debt
6. ConsumerFinance.gov. “Consuemrs Use of Buy Now, Pay Later and Other Unsecured Debt.” https://files.consumerfinance.gov/f/documents/cfpb_BNPL_Report_2025_01.pdf
7. myFICO.com. “Will Closing a Credit Card Help My FICO Score?” https://www.myfico.com/credit-education/faq/cards/impact-of-closing-credit-card-account
8. CreditKarma.com. “What is a balance transfer fee and how does it work?” https://www.creditkarma.com/credit-cards/i/what-is-a-balance-transfer-fee
9. CapitalOne.com. “What is a cash advance on a credit card?” https://www.capitalone.com/learn-grow/money-management/cash-advance/
10. AmericanExpress.com. “What You Should Know About Foreign Transaction Fees.” https://www.americanexpress.com/en-us/credit-cards/credit-intel/foreign-transaction-fees/#:~:text=This%20is%20important%20to%20know,points%20or%20cash%2Dback%20bonuses
11. Experian.com. “What Is an Authorized User on a Credit Card?” https://www.experian.com/blogs/ask-experian/what-is-credit-card-authorized-user/
12. APNews.com. “How to avoid credit card late fees after a court threw out a proposed cap.” https://apnews.com/article/credit-card-late-fees-cap-judge-36d61caf70a108dbdc9c6304785523b5
13. CreditKarma.com. “How long do late payments stay on my credit report?” https://www.creditkarma.com/credit/i/how-long-do-late-payments-stay-on-credit-report
14. Experian.com. “What Is a Returned Payment Fee?” https://www.experian.com/blogs/ask-experian/what-is-returned-payment-fee/
15. Chase.com. “Over-limit fee: What it is & how it works.” https://www.chase.com/personal/credit-cards/education/basics/over-limit-fee-what-is-it

About the author

Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. She is the founder of CreditWriter.com, an online credit education resource and community that helps busy moms learn how to build good credit and a strong financial plan that they can leverage to their advantage. Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many other outlets. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).

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