Are fee-free credit cards really free?

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February 11, 2011

Fee-free credit cards might sound like a great deal, but are they as good as they seem?

Fee-free cards have no annual fee but there is a trade-off: higher interest rates.

RateCity compared five fee-free cards and found their interest rates range from 11.80 percent to 20.49 percent. This is significantly higher than the top five low-interest credit cards on RateCity, which feature rates from 5.99 percent to 13.49 percent.

The good
So why use a fee free card? The obvious reason is you won't be paying any bank fees.

"Generally a no-annual-fee card is targeted towards the value-seeker who isn't bothered about reward points or any other bells and whistles," a spokesperson from Virgin Money says.

"Think of a no-annual-fee card as a no-frills product that gets the job done, which should offer great value with a competitive interest rate and balance-transfer rate."

These types of credit cards will suit you if you pay off the full amount of the card within any interest-free period.

Fee-free cards can also be good to keep in a drawer for emergencies. For example, if your purse or wallet is stolen and you're left with no money or access to it.

They can also be handy for large purchases that you know you can pay in full within any interest-free period, such as a TV on sale that you can pay off when your pay hits your account.

And the bad
There are some downfalls. Fee-free cards often don't feature a rewards program, which means no frequent flyer points or anything remotely resembling an "add-on". Just think of the cards as the Aldi version of supermarkets.

Unlike the standard interest-free period of 55 days, some fee-free cards have a lower period of 44 days.

Also, some cards may only be exempt from the annual fee for a promotional period, such as 12 months, so make sure you read the fine print for any conditions.

Several lenders offer fee free cards - compare them and choose the right one for you and your needs.

"Everyone's circumstances are different, but if it's a no-frills product you're after and you don't want to pay a fee for your card, a no annual fee card may be the way to go," the spokesperson for Virgin Money says.



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