What credit card transaction fees are and who pays them
A transaction fee is a charge that appears when you use your credit card to buy something. Most of the time you do not see it — the merchant pays it to the card network and the bank. But some transactions charge the customer directly, and understanding which ones do matters for your wallet.
The most common transaction fees you might pay yourself are cash advance fees (usually 3 to 5 percent of the amount withdrawn, with a minimum charge), balance transfer fees (typically 3 to 5 percent of the amount moved), and foreign transaction fees (usually 1 to 3 percent when you buy outside the United States). Some cards charge a fee just to use an ATM that is not run by your bank. A few cards charge an annual fee to hold the card at all, though many cards with no annual fee exist.
Behind the scenes, merchants pay what is called an interchange fee every time a customer swipes a credit card. This fee goes to your bank and the card network (Visa, Mastercard, American Express, Discover). The merchant cannot pass this fee directly to you by law, but they can build it into their prices. That is why some stores offer discounts for paying cash — they are avoiding the interchange fee.
Key Takeaways
- Cash advances, balance transfers, and foreign purchases charge you a percentage fee at the time of the transaction, and these fees are added to your balance when ready.
- Annual fees, ATM fees, and late fees are charged by your bank and appear on your statement; you can often avoid them by choosing a different card or following the card's rules.
- Interchange fees are paid by the merchant, not you, but they affect how much stores charge for goods and services.
- Reading your card's terms before you sign up tells you exactly which transactions will cost you money and how much.
Cash advances and balance transfers cost more than regular purchases
When you take cash out using your credit card at an ATM or ask a bank teller for cash, you are taking a cash advance. Your card issuer charges a fee for this — often 3 to 5 percent of the amount, with a minimum of $5 to $10. So withdrawing $200 in cash might cost you $6 to $10 in fees alone. That fee is added to your credit card balance right away, and you start paying interest on it when ready. Most cards charge interest on cash advances from the moment you withdraw them, with no grace period like you get for regular purchases.
A balance transfer is when you move debt from one card to another, usually to take advantage of a lower interest rate. The card you are transferring to charges a fee — typically 3 to 5 percent of the amount transferred. If you move $5,000 from one card to another, expect to pay $150 to $250 in transfer fees. That fee is added to your new balance, so you are paying interest on the fee itself unless you pay off the balance before interest kicks in.
Both of these transactions are sometimes worth the fee if the alternative is worse — a cash advance might be cheaper than a payday loan, and a balance transfer might save you money if the new card's interest rate is much lower. But they are not information programs moves. Calculate the fee cost against what you would pay in interest on the old card before you decide.
Foreign transaction fees explore when you buy outside the United States
If you use your credit card to buy something while traveling abroad or to purchase from a foreign website, your card charges a foreign transaction fee. This is usually 1 to 3 percent of the purchase amount. A $100 purchase might cost you an extra $1 to $3. The fee covers the cost of converting your purchase from the foreign currency to dollars and moving the money across international banking systems.
Some cards, particularly travel rewards cards and cards marketed to frequent travelers, waive foreign transaction fees entirely. If you travel regularly or buy from international websites often, comparing cards on this single feature can save you hundreds of dollars a year. A card with no foreign transaction fee might have an annual fee of $95 to $450, so do the math: if you spend $5,000 abroad each year and would normally pay 2 percent in fees, that is $100 in fees. A card with a $95 annual fee and no foreign transaction fees would cost you $95 instead, saving you $5.
Annual fees, ATM fees, and late payment fees
Some credit cards charge an annual fee just for holding the card — these range from $25 to $450 or more per year. Premium cards with high annual fees usually offer rewards, travel benefits, or other perks that are supposed to make up for the cost. A card with a $95 annual fee might give you $200 in travel credits, making it worthwhile if you use those credits. A card with a $450 annual fee is only worth it if you spend enough to earn rewards that exceed the fee.
Many cards charge an ATM fee if you withdraw cash from an ATM that is not run by your bank — typically $2 to $5 per withdrawal. This is separate from the cash advance fee. If you use out-of-network ATMs regularly, the fees add up fast. Choosing a bank with a large ATM network or a card that reimburses out-of-network ATM fees can save you money.
A late payment fee is charged when you miss your due date. Federal law caps this at $29 for a first offense and $40 for a second offense within six months. More importantly, a late payment also triggers a higher interest rate on your card — sometimes called a penalty APR — which can jump to 25 to 29 percent. Missing a payment by even one day can cost you far more in interest than the late fee itself. Setting up automatic minimum payments or calendar reminders prevents this entirely.
How to avoid transaction fees
The easiest way to avoid most transaction fees is to use your card for regular purchases and pay the full balance by the due date. This eliminates cash advance fees, balance transfer fees, late fees, and interest charges. You get the rewards without the costs.
For cash advances, use your bank's ATM or ask for cash back at a store instead. Both are free or much cheaper than a credit card cash advance. For balance transfers, only do one if the new card's interest rate is significantly lower and you have a plan to pay off the balance before the promotional rate ends.
If you travel internationally, compare cards before you go. A card with no foreign transaction fees might save you more than the annual fee costs. If you do not travel, do not pay for a premium card you will not use — a no-annual-fee card with basic rewards is often the better choice.
Read the terms and conditions before you sign up for any card. The issuer must disclose all fees in a document called the Schumer Box, which lists the APR, annual fee, cash advance fee, balance transfer fee, foreign transaction fee, and other charges. Comparing this box across cards shows you exactly what you will pay.
Understanding interchange fees and why merchants care
When you swipe a credit card at a store, the merchant pays an interchange fee to your bank and the card network. This fee is usually 1 to 3 percent of the purchase amount, though it varies by card type and merchant category. A grocery store paying 1 percent on a $100 purchase pays $1 in interchange fees. A restaurant paying 2.5 percent on a $100 bill pays $2.50.
Merchants cannot legally charge you a separate fee for using a credit card, but they can build the cost into their prices. This is why some stores offer discounts for paying cash or debit — they are avoiding the interchange fee. It is also why some small businesses prefer cash or debit cards. The interchange fee is one reason credit card rewards exist: the card issuer uses some of the interchange money to pay for your cash back or points.
You do not pay interchange fees directly, but they affect the prices you see. Understanding that they exist helps explain why credit cards cost merchants money and why some businesses have minimum purchase amounts for card use.
Frequently Asked Questions
Can a store charge me extra for using a credit card?
No. Federal law prohibits merchants from charging you a separate fee for using a credit card. They can offer a discount for paying cash or debit, but they cannot add a surcharge for credit. Some merchants illegally add a "credit card fee" anyway — if this happens, report it to your state's attorney general or the Federal Trade Commission.
What is the difference between a cash advance fee and a regular ATM fee?
A cash advance fee is charged by your credit card issuer when you withdraw cash using your card — usually 3 to 5 percent. An ATM fee is charged by the ATM operator when you use an out-of-network machine — usually $2 to $5. You can be charged both at the same time. Using your bank's ATM or asking for cash back at a store avoids both.
Is a balance transfer worth the fee?
Only if the new card's interest rate is much lower and you have a realistic plan to pay off the balance before interest kicks in. If you are moving $5,000 at a 3 percent transfer fee ($150) from a card charging 20 percent APR to a card charging 0 percent for 12 months, the fee pays for itself in less than a month. If you are moving the same amount between two cards both charging 18 percent, the fee is just extra debt.
Do I have to pay an annual fee?
No. Thousands of credit cards charge no annual fee. If your current card charges an annual fee and you do not use the benefits, call the issuer and ask them to waive it, or switch to a no-annual-fee card. You should never feel obligated to pay for a card you do not use.
What happens if I miss a credit card payment by one day?
You will be charged a late fee (up to $29 for a first offense) and your interest rate may jump to a penalty APR of 25 to 29 percent. This higher rate applies to your entire balance, not just new purchases. The interest cost far exceeds the late fee. Set up automatic payments or reminders to avoid this.