No Fee Credit Cards

Credit card companies offer all kinds of special offers including no fee credit cards. What is the truth about no fee credit cards? Are they really cheaper than others? To find that answer, examine the small print and compare offers.

At first glance, a credit card no fee offer looks like a good thing. Look closer to discover where else the credit card company is going to make money off your transactions. Is there another card that charges a small annual fee that has a lower interest rate than the credit card no fee company? You may actually pay more with credit cards featuring no annual fee if their interest rates are higher.

Other small print disclosures to look for include:
• Is the interest rate fixed or variable? Variable rates can skyrocket when the economy improves.
• How high are penalties and late fees?
• Is there a no interest grace period or is interest charged from date of purchase?
• Is there a time limit for the no fee period?

Most credit cards with no annual fee are a great deal. They are reserved for consumers who have very good to excellent credit scores, above 700 on the 300-850 rating scale. These customers represent a minimal risk of default to the credit card companies. The card companies understand that persons with excellent credit pay their bills on time or early, so they have much less expense involved in collections efforts and staffing to handle late paying accounts.

Interest rates for many of the no fee credit cards appear to now be variable, rather than fixed. This can present a problem for consumers. The variable rates are determined by the federal discount rates. With the poor economy today, these rates are at their lowest. However, as the economy improves, the federal discount rates will rise to prevent too rapid an acceleration in the economy. This means variable rates that are pegged to the federal discount rate will also rise automatically.

About half of the states in the United States do have caps on the amount of interest lenders can charge. The trend, unfortunately for consumers, is to remove interest caps. Lenders can then charge whatever they want. Some relief is provided in the recent consumer credit protection laws passed by Congress. It does not stop interest rate rises, but it does make the credit card companies give ample warning to card holders so they can take evasive action to move their debt elsewhere.

The highest interest rate out there is a whopping 79.9% at First Premier Bank. The state of Arkansas has the lowest cap on interest rates, holding them at just 5% over the federal discount rate. The May 2010 federal discount rate is 0.75%, up from 0.50% one year ago. As the economy improves, the variable rates will rise as the federal rates rise slowly to prevent the economy from overheating. No fee credit cards are still an excellent option for consumers who pay off balances quickly.