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Why Don’t I Have to Pay a Fee to Apply for a Credit Card?

May 22, 2014
Credit Cards
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Let’s face it: Fees have become so commonplace that we barely notice them anymore. Getting slapped with a charge for traveling on a highway, checking our luggage at the airport or having a meal delivered is considered a part of modern life.

So why is it that we don’t have to pay a fee to apply for a credit card? After all, many other types of loans charge application fees. If you have a credit card and are curious about how you’ve dodged this expense, take a look at the details below. You might be surprised at what you find!

The fee that should be

In theory, it would be perfectly reasonable for banks to charge potential customers a small fee every time they apply for a new credit card. The reason relates to the credit card application process; when an issuer is considering whether or not to lend to you, they need to check your credit to make an informed decision. This isn’t free – every credit check costs money, so it would be sensible for the bank to pass that expense onto you.

What’s more, credit card application fees don’t fall under the restrictions set out by the 2009 CARD Act. The Consumer Financial Protection Bureau (CFPB), which is responsible for implementing the CARD Act, imposes a limit on the fees credit card issuers can charge consumers. Originally, this limit was supposed to apply to fees charged before the account was opened and fees charged in the customer’s first year with the account. This means application fees would have been regulated by the Act.

But in 2013, the CFPB decided not to oversee fees charged before a card was opened. Now, only fees collected in the first 12 months after an account is activated can be restricted. This leaves the door open for credit card companies to charge exorbitant application fees without having to worry about the long arm of the law.

Why don’t issuers charge you to apply?

The simple reason that credit card companies don’t charge application fees is competition. In a market that’s flooded with options, the issuer that puts up a barrier to getting its card is going to start losing customers – and fast.

Consider the following scenario: You’re looking for a good travel rewards credit card and have narrowed the pool to two great cards. As is often the case, both cards offer similar features and you’re having trouble deciding between them. If one card charges an up-front fee just for applying, you’re likely going to use this as the tie-breaking factor and opt for the other card.

All things being equal, everyone will choose to avoid an extra charge, and credit card issuers know that this is how we think. Unless they all start charging application fees, none of them will be able to get away with doing so.

Plus, credit card companies have a whole host of ways to make money. The calculated decision to forgo application fees in favor of attracting more customers is probably sound – some potential profits are lost, but there’s a lot to be gained if more people sign on to the card.

Other credit card fees are avoidable, too

Paying to apply for a credit card might seem wasteful, but the truth is that many of us are paying fees that could also be avoided. For example:

  • Late fees – Simply paying your bill on time could save you $25-$35
  • Foreign transaction fees – If you travel a lot, look for a card that doesn’t charge this fee. There are lots of options out there!
  • Cash advance fees – Having an easily accessible emergency fund will make taking a cash advance unnecessary.
  • Annual fees – Annual fees are only worthwhile if you’re earning enough in rewards to outweigh them. If not, opt for a card that doesn’t carry this fee.

The bottom line: It would be understandable if credit card companies charged application fees, but they choose not to in order to keep our business. Just be sure you’re not paying other fees you could easily do without!

Credit card application image via Shutterstock