What is an inactivity fee?

An inactivity fee is a new fee that many credit card companies are employing to encourage customers to either start spending or risk losing their account. In short, the CARD Act put a serious dent in the wallets of the credit card companies; in response, they began cutting the dead weight, so to speak. In other words, they are now looking to cut ties with those customers who held a credit card, but did very little spending on it.

Why are credit card companies charging this fee?

Because of the CARD Act, and the poor economy of the last, few years, fewer people have been using charge cards. As a result, credit card companies began imposing inactivity fees to: (a) encourage consumers to start spending on their credit cards again; and (b) generate revenue lost by the legislation of the CARD Act.

How do I know if my credit card company is charging an inactivity fee?

The inactivity fee must be detailed in your card’s terms and conditions, so read them closely. Each credit card will have its own rules regarding inactivity fee – mainly the time that elapses before you are charged this fee – and some cards do not even charge this fee. If in doubt, give your credit card company a call to verify whether they are imposing an inactivity fee.

How can I avoid paying an inactivity fee?

If you have a credit card, but you relegate it to the back of your wallet for use only in emergencies, you could be facing an inactivity fee from your credit card company. Unfortunately, most credit card companies are not willing to negotiate this fee. So to avoid this charge, simply make a point of spending on the card a couple times a year.

Credit card companies and the issuing banks get paid every time credit card customers make purchases. Here is a breakdown of how the process works:

• Credit cards are typically offered by banks, who lend money to consumers via loans and credit cards. The interest earned is their payment. But it doesn’t stop there.
• The first part of this equation occurs when you walk into a store and make a purchase using your credit card. The card is swiped through a credit card reader, which sends the purchase information to the bank that issued your credit card. The bank will then give the retailer the OK to pay the purchase.
• The retailer’s bank makes a small amount of money from this transaction. The money made by the bank is split between the credit card company and the bank that issued the credit card. Fees charged by banks vary between credit card companies and retailers.
• The money made by credit card companies doesn’t end at the transaction, though. The fees charged by credit card companies to consumers for late payments, going over the credit card’s limit and annual fees are also sources of income. In addition, most banks must pay money to the credit card company for the luxury of being a part of the Visa or MasterCard networks.
• The issuing bank and the credit card company share a percentage of the money they receive from every purchase made using a credit card. The credit card company and the issuing bank usually negotiate the percentage received by both parties.
• Card issuers and banks, before the CARD Act, also had a number of opportunities to make additional money from credit card customers. They would often sell customer names and addresses for direct mail marketing purposes, and they would also sell advertising space to other companies on the statements sent to customers each month.

Let’s start with the obvious: if you pay your credit off, in full, each month, you won’t have to worry about pesky finance charges. Unless you are certain that you can pay off your balance in full, don’t charge it! Many of us have found ourselves in the unfortunate situation of not being able to pay off our credit card balances in full each month and end up with mounting debt. In addition, pay close attention to your card’s billing cycle and your due date, and plan to pay the bill at least five days before the due date to avoid any finance charges.

However, in addition to finance charges, you may be paying other numerous fees for your credit card:

• Annual fee – The simple fact is that you don’t need to pay an annual fee for the privilege of accepting a credit card. Although some individuals accept an annual fee because of other rewards and incentives offered by certain credit cards, in general you should not have to pay an annual fee on a credit card. If you have a good credit history with your credit card, chances are you can negotiate to have this fee removed.
• Cash advances – Cash advances should not be used, if possible. First of all, they come with exorbitantly high interest rates; second of all, there are often fees associated with them. Avoid them at all costs and you’ll be much better off.
• Balance transfer fees – Although it may be hard to do, many creditors are now offering fee-free balance transfers. Considering that balance transfer fees may cost as much as 5 percent of the balance of the transfer, this could end being quite a costly fee for you.

However, Visa and Mastercard may soon be antiquated, leaving them feeling more than a bit threatened with this emerging technology.

Atlanta and three other big cities not yet named will be the location of the upcoming tests of the mobile payment system. Although the particulars of the system have not been fully disclosed, we do know that it will work by holding your smartphone in front of an electronic reader at your favorite retailers.

All transactions using this method will be processed through Discover Financial Services, the fourth-biggest payment network in the country. The London-based Barclays will help manage the accounts processed through Discover.

An End to Visa and Mastercard Fees?

Many retailers, who have for years had to put up with the transaction fees charged by Visa and Mastercard may be inclined to steer towards this method of payment. Most retailers have argued for years that there is no real competition in the credit card business; this mobile payment system may be just what this industry needs to create a healthy competition. Many retailers feel that any new payment system that would reduce their fees would be quite welcomed.

Visa and Mastercard payments currently make up more than half of all U.S. consumer purchases, compared to just 36 percent in 2003, according to the Nilson Report. Visa and Mastercard accounted for a whopping $2.45 trillion, or 79 percent, of all purchases last year. This number represents both credit cards and debit cards.

Merchants will have to pay about $200 per electronic reader and phone costs are expected to increase between $10 and $15, but many people see this change as well worth the money, especially because of the sheer convenience that it will afford both retailers and consumers.

According to Mercatus, a consulting firm in Boston, more than half of all U.S. consumers will use mobile financial services within the next five years. Eighty percent of those consumers will be between the ages of 18 and 34.

The question is: should you pay an annual fee for your credit card?

If you have good credit and you’ve proven yourself to be a good credit card customer, then absolutely not. As consumers, there are certain things that we will inevitability have to put up with, given the state of the economy and the pitiful state of the credit card industry. However, annual fees shouldn’t be one of them.

Who wants to pay their creditor for the privilege of spending their own money? I certainly don’t, and neither do most consumers.

Testing out Annual Fees

There are many reports that credit card companies are now in the process of “testing out” annual fees for their credit cards, which means that if enough consumers complain about this unnecessary fee then most companies will ditch their annual fees and leave them in the trash, where they need to remain.

Bank of America, for example, recently announced that it would start to “test” annual fees for its customers, and charge a select group of customers an annual fee of anywhere from $29 to $99, although it isn’t clear how they will decide which customers pay the lower fee and which customers will be charged the higher fee, and if there are any fees in between.

When you may not Have an Option

There is, perhaps, one occasion that you should simply pay the annual fee and quietly go on your way. If you have poor credit or have been unable to pay your credit card bills in a timely fashion then you probably don’t have a whole lot of options when it comes to annual fees. In other words, if you dispute your annual fee, your creditor may very well tell you that you must pay the fee or risk losing the card.

Your best bet, as a credit card customer, is to simply contact the creditor and request that the annual fee be removed from your account. Some companies will comply, particularly if you have proven yourself to be a good customer, while others will stick to their guns.

It’s no surprise, really, that consumers are frustrated with their credit cards, as many have been socked with outrageous fees and equally outrageous interest rates as creditors scramble to recoup some of their losses.

Highlights of the J.D. Power and Associates Poll (which was conducted in May and June by 9,000 credit card customers):

• Twenty percent of credit card holders saw an increase in their interest rates between 2008 and 2009.
• Eighteen percent of credit card holders were dissatisfied with fees on their credit cards, which was a 10 percent jump from just a year earlier.
• The customer satisfaction index fell to 703 (on a 1,000-point scale), which is the lowest since J.D. Power and McGraw-Hill began the customer index satisfaction survey in 2007.
• Credit card customer satisfaction comes in dead last among all financial services industries, including banking, insurance and investment services.
• One out of five customers experienced a rise in their interest rate over the past year.

It is clear from this recent survey that most consumers are simply fed up with the over-the-top rates and fees being charged by many credit card companies as of late. As the government put the squeeze on credit card companies, and as the recession took its hold, credit card companies started responding by slashing rewards for customers and raising rates.

And this doesn’t sit very well with customers, as to be expected.

American Express, which is the largest credit card company based on sales, was ranked first in the poll for customer satisfaction, followed by Discover Financial Services and JPMorgan Chase. Those ranked below the industry’s average included Citigroup, Bank of America and Capital One.

It is important to note that American Express, Bank of America, JPMorgan, Citigroup, Capital One and Discover make up about 80 percent of the industry in the United States.

The J.D. Power and Associates poll reviewed customer satisfaction based on many factors, including rewards, benefits, services, problem resolution, interaction, fees, rates, billing and payment processing.

Well, this answer certainly is up for debate, although there are plenty of pros and cons, for both credit card and debit card use, which you should consider before making your next purchase:

Pros of Debit Cards

• Ideal for consumers who want to avoid credit card debt
• Usually no fees associated with debit card purchases
• Ideal for staying within your budget, as the money is withdrawn from your bank account
• Usually accepted where most credit cards are accepted
• No monthly bills or interest rates to worry about

Cons of Debit Cards

• You may face large insufficient fees through your bank if you overspend (this can be solved by linking your savings account to your checking account for overdraft protection)
• May not afford customers the same incentives and perks of credit cards (cash back rewards, rebates, etc.)
• May not offer the protection against fraud and defective goods and services that credit cards offer
• A thief may be able to drain your bank account before you notice fraud (although your debit card may be protected against fraud, it may take some time to receive your lost money)

Pros of Credit Cards

• No need to pay interest fees if you pay it off within the first billing cycle
• Typically accepted at most retailers
• Offers the luxury of buying now, paying later
• May prove extremely useful in emergency situations
• Offers different types of perks and incentives, such as cash back rebates and travel incentives
• Protects cardholders from fraudulent account activity or defective goods and services
• Positively affects your credit score, if used properly

Cons of Credit Cards

• Can negatively impact your credit score, if used improperly
• Charges interest fees if the balance is not paid in full each month
• Can cause you to overspend, or purchase items that you don’t need
• Can get you in over your head in debt, thereby negatively impacting your budget

They failed to pay their bill on time, the credit card company raised their interest rates and slapped them with fees and charges, and now they are simply stuck paying a high balance on a credit card with a high interest rate. Plus, now that their credit is in the gutter, they have little chance of transferring the balance to another credit card with a more reasonable interest rate.

Unfortunately, this is not an uncommon occurrence. In fact, many consumers are stuck in this situation because of past mistakes or bad circumstances. With this in mind, it is important to understand that there are things you can do today to prevent this kind of nightmarish situation:

• Read and re-read your credit card’s terms and conditions.

Those loose little papers that come with your bill often provide important information that most consumers simply choose to discard instead of read. Your credit card’s terms and conditions – or, more importantly, changes to these terms and conditions – can have a big impact on the way you use your credit card or pay your credit card bill.

• Always, always, always pay your bill on time.

There is simply nothing more that needs to be said about this rule. All credit card holders should abide by this rule and use it as a mantra, whenever possible!

• Pay more than the minimum. Or better yet, pay it off each month, if possible.

Don’t squeak by each month by simply paying the minimum balance on your credit card. Make yourself a budget and find extra money to put towards your credit card bill. Even as little as $10 or $20 a month can make a huge difference in your balance over the long run!

• Call your credit card company and negotiate a better deal.

If you have been a loyal customer and have always maintained a good standing with the credit card company then you may be in the position to negotiate a better interest rate. If not, then it may be time to look for a better credit card.

Making the decision to own a credit card and pay the monthly bill on time, without fail, is a decision which should not be taken lightly. A credit card can be a tremendous convenience, and it can certainly be a practical way to pay monthly expenses without dealing with cash and checks. However, it can also become overwhelming if you don’t approach credit card ownership with financial common sense.

With that said, there are the ABCs of credit card ownership that you should keep in mind should you decide to own a credit card:

• Always pay your bill – no exceptions! Treat your credit card bill just like you would you mortgage or car payment, as neglecting to do this could seriously impact your credit rating. One of the simplest ways to make sure your credit card bill is paid on time is to immediately pay it when you receive the bill. If you make a point to do this every month, then you won’t ever be caught in a situation where the credit card bill simply slipped your mind.
• Be aware of the credit card’s terms and fees. Many credit card owners fail to investigate all of the fees and terms associated with their credit card, and then are shocked to discover additional expenses each month. Remember: it is your responsibility to read and understand all of the fine print associated with your credit card.
• Consider credit card reward programs when choosing your credit card. Many of today’s credit cards include reward programs that offer great incentives on everything from hotels to airfare. Your job is to sort through the different types of credit cards and find the one that is best suited for you. For example, if you are a business traveler, you may want to consider a credit card that offers rewards in the form of free hotel stays. Of course, you should also take the credit card’s interest rate and associated fees in mind when choosing a reward credit card, but it is certainly worth your time to explore your options when considering which credit card is right for you.