What is a low activity charge?

A low activity charge is a charge that can be charged to card holders who do not have the required amount of transactions on the card in any given month.  It can be quite common on low and no annual fee credit cards.

Low activity charges act as a proxy for annual fees in that they pay for the administration of a credit card instead of an annual fee.  Annual fees are designed to cover the administration costs on a credit card.  However many firms found that it was actually quite possible to cover the administration costs with the interest that was charged on credit cards.  There were also merchant fees, which are the transaction fees that are charged to the shops and service providers who accept credit cards in return for processing the credit card.  These make up a considerable part of most credit card operators profits.

Some of these card companies started charging no annual fees in order to attract credit card users.  The credit cards would then make their money through the higher interest rates and the increased number of transactions that would go through the credit card companies’ accounts.

Unfortunately for these companies the type of credit card user for which the no annual fee credit card is most attractive to is the infrequent user of a credit card.  As no annual fee credit cards do not tend to have good reward programs then people who make a large amount of transactions may do better paying an annual fee and getting credit cards that either have a good rewards program or an attractive cash back rate.  Similarly people who borrow a lot of money on a credit card and keep the balance going month on month may benefit from a low interest credit card.

The people who tend to do best with a low annual fee credit card are people who have a low amount of transactions on a card and who pay off their balance every month.  Unfortunately these are not profitable customers for credit card companies.

Many credit card companies have put in low activity charges which are essentially a replacement for an annual fee.  If a credit card holder has a high amount of spending in a given month then they will cover the monthly administration costs anyway, if they don’t then they will be charged a fee.  A low activity fee over the whole of the twelve months will usually be higher than an annual fee, and so should only really be considered if there are going to be a large number of transactions in a year.