Credit Card Fees, Charges & Interest-Free Period
Learn about credit card fees and charges for NSW Year 12 Mathematics Standard 1 (NESA outcome MST-12-S1-03). Using a credit card can cost more than just interest, and a card that looks cheap can become expensive once every fee over the year is added up.
You will recognise the different costs that come with using a card — the annual fee, cash advance fee, late payment fee and foreign transaction fee — and explain what an interest-free period is, and why it only works when the whole balance is paid by the due date. These skills help you choose a card and avoid costly surprises.
Theory
Using a credit card can cost more than interest. This Year 12 Mathematics Standard 1 (NSW) guide covers the annual fee, cash-advance fee, late-payment fee and foreign-transaction fee, how to work out “the greater of” a flat fee or a percentage, and how the interest-free period only works when the whole balance is paid on time.
Credit cards charge fees for owning the card and for some ways of using it. Add up every fee over the year to find what a card really costs.
The annual fee is charged once a year, whether or not the card is used. A cash-advance fee is charged for taking out cash; it may be a flat amount, a percentage, or the greater of the two, e.g. the greater of \(\$4\) or \(2\%\). A fee of \(2\%\) with a minimum of \(\$3\) means the same as the greater of \(\$3\) or \(2\%\). A late-payment fee is a flat amount each time a payment is late. A foreign-transaction fee is a percentage of the converted AUD amount, e.g. \(3\%\) of \(\$200=\$6\), so the card is charged \(200+6=\$206\).
The interest-free period gives up to a set number of days (often \(44\) or \(55\)) with no interest on purchases, but only if the closing balance is paid in full by the due date. Cash advances get no interest-free period: interest starts on the day of the advance.
The total cost of a card for the year adds the annual fee to each per-use fee times the number of times it happens:
A percentage fee, such as a foreign-transaction fee:
“The greater of” a flat fee and a percentage:
How to work out the cost of a credit card
- List the fees that apply: annual, cash-advance, late-payment, foreign-transaction.
- Multiply each per-use fee by the number of times it happens; for a percentage fee, multiply the rate by the amount. For “the greater of”, work out both and take the larger.
- Add everything to get the total for the year, then compare cards or check whether the interest-free period applies.
Add the annual fee to each per-use fee \(\times\) the number of times.
| \(\text{Annual}\) | \(=\) | \(\$199\) |
| \(\text{Cash adv.}\) | \(=\) | \(4\times3.50=\$14\) |
| \(\text{Late}\) | \(=\) | \(3\times20=\$60\) |
| \(\text{Total}\) | \(=\) | \(199+14+60=\$273\) |
Hana pays \(\$273\) in fees for the year.
Work out \(2\%\), then take the larger of it and \(\$4\).
| \(\text{(i) }2\%\) | \(=\) | \(0.02\times600=\$12\) |
| \(\text{fee}\) | \(=\) | \(\text{greater of }\$4\text{ and }\$12=\$12\) |
| \(\text{(ii) }2\%\) | \(=\) | \(0.02\times120=\$2.40\) |
| \(\text{fee}\) | \(=\) | \(\text{greater of }\$4\text{ and }\$2.40=\$4\) |
(i) \(\$12\), (ii) \(\$4\).
| Fee | Card A | Card B |
|---|---|---|
| Annual fee | \(\$0\) | \(\$79\) |
| Cash-advance fee | \(\$4\) each | \(\$0\) |
| Foreign-transaction fee | \(3\%\) | \(0\%\) |
Total each card's fees for Leo's use.
| \(\text{A}\) | \(=\) | \(0+12\times4+0.03\times1500\) |
| \(\) | \(=\) | \(0+48+45=\$93\) |
| \(\text{B}\) | \(=\) | \(79+0+0=\$79\) |
| \(\text{saving}\) | \(=\) | \(93-79=\$14\) |
Card B is cheaper by \(\$14\).
Apply the interest-free rules.
(i) Paid in full on time \(\Rightarrow\) no interest on the phone.
(ii) Cash advances get no interest-free period \(\Rightarrow\) interest from the day of the advance.
(iii) Balance not paid in full \(\Rightarrow\) the interest-free period is lost, so interest is charged on the unpaid balance and on new purchases straight away.
Let \(n\) be the number of cash advances. Write each card’s cost, then make them equal.
| \(\text{Card M}\) | \(=\) | \(108\) |
| \(\text{Card N}\) | \(=\) | \(4.50n\) |
| \(4.50n\) | \(=\) | \(108\) |
| \(n\) | \(=\) | \(\dfrac{108}{4.50}=24\) |
The two cards cost the same for \(24\) cash advances.
Common pitfalls
Frequently asked questions
What fees do credit cards charge?
Common fees are an annual fee charged once a year, a cash-advance fee for taking out cash, a late-payment fee each time a payment is late, and a foreign-transaction fee that is a percentage of overseas purchases.
How does the interest-free period on a credit card work?
Purchases are charged no interest for up to a set number of days, often 44 or 55, as long as the whole closing balance is paid by the due date. How many free days you get depends on when in the statement period you buy.
Do cash advances get interest-free days?
No. Cash advances have no interest-free period, so interest is charged from the day you take the cash, and a cash-advance fee is usually charged as well.
What does the greater of 4 dollars or 2 percent mean?
Work out 2 percent of the amount and compare it with 4 dollars, then pay whichever is larger. On 600 dollars the fee is 12 dollars; on 120 dollars, 2 percent is only 2.40 dollars so the fee is 4 dollars.
What happens if I only pay part of my credit card balance?
You lose the interest-free period, so interest is charged on the unpaid balance and on new purchases straight away.