Credit Card Guide

What is an Activation Fee?

5 July 2011 by CreditCardsCo™

There are a handful fees that you could pay when you apply for a credit card. Some of these fees are relatively standard while others will depend on the credit card company. One of these optional fees is the activation fee, which is something that you only pay simply for applying for a card.

The activation fee is one of the many fees that you could potentially have to pay when you take out a credit card. When you are approved for your card, this fee is added to balance immediately. Not only credit cards will assess this fee but it is one of the most common optional fees.

When you apply for a new credit card, you probably expect that you will have to pay a variety of finance charges and other fees. While it is possible to avoid some of these, based on how responsible you are with your account, others might depend on the credit card company.

It is very common to pay a variety of fees within the first year of opening a credit card account. In fact, the standard limit that credit card companies are allowed to charge is up to 25% of the card limit. The Credit Card Act of 2009 ensures that this 25% cap is maintained by all companies but allows them to choose how they will incorporate their fees. This could include:

The combination of fees that a particular credit card company could elect to charge you in order to maximize their 25% will likely depend on several factors:

  • Your credit history
  • The type of card you apply for
  • The amount of credit you apply for

Activation Fee

One of the most common fees that you will find when you apply for a credit card is the application fee. This is a fee that is automatically added to your card when you are approved. This fee goes by many names including "application fee," "processing fee," and others and can be somewhat unsubstantial for cards with lower limits, including prepaid cards, and much larger for credit cards with higher limits.

Secured Cards

Activation fees are more common to secured cards and debit cards but they can also be attributed to standard credit cards as well. Part of the reason for this is that secured cards are usually offered to people with less-than-stellar credit as well as people who prefer simpler credit ventures. In terms of the former, this means that there is a greater risk for default or for unstable credit card activity. The activation fee, in this case, helps to defer some of the risk borne to the credit card company and to ensure that the credit card issuer will not lose money in the deal.

Prepaid Cards and Gift Cards

A prepaid debit card is another type of secured credit card. gift cards also fall into this category. These types of cards are typically used in a limited capacity and then usually discarded once there is no balance remaining. Activation fees are common to these cards as well since it is another way that credit card companies can ensure that they will make a profit. Obviously, a card with a limited scope of use will not generate much in terms of interest over a long period of time.

Conclusions

The activation fee is one of many fees that you could be assessed in the early life your credit card. It is common within the credit card industry but each credit card company will decide if they wish to charge it.

Other Readings

Credit Card FAQ





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