In this report

Hidden fees exposed

Those annoying extras can add up. Here’s how to avoid them.

Last reviewed: January 2010

Unexpected fees hidden in bills are the biggest everyday annoyance for Americans, according to a recent survey conducted by the Consumer Reports National Research Center. These fees are often small, but they're cropping up in more places.

You can't do much about some fees, like the special taxes on products and services. But you don't have to sit still and be nickeled-and-dimed by companies that hide extra costs behind seemingly attractive offers. Below we expose some of these annoying expenses and offer advice on what you can do about them.

Mutual funds, IRAs and 401(k)s

Mutual fund fees aren't really hidden. They're disclosed in fund prospectuses, which is why it's important to read those documents, uninviting as they are. The most onerous fee charged by some mutual funds is an up-front sales charge, or "load," that lops 3 percent to 8.5 percent off the top of any money you invest. Annual expenses are another drag on a fund's performance. They are administrative and management costs, expressed in the prospectus as the expense ratio.

A reasonable level of expenses depends on the type of assets in which the fund invests. Foreign and especially emerging-markets stock funds will typically have high fees, because they are more costly to manage. Bond funds, on the other hand, are less of a challenge for their managers and rarely return more than 5 percent annually, so they should cost less to administer. Morningstar, an investment-research company, recommends never paying more than 1.25 percent annually for emerging-market or specialty funds, 1 percent for broadly diversified equity funds, or 0.75 percent for bond funds. Index funds are even cheaper. For example, Vanguard doesn't charge more than 0.4 percent for any of its index funds.

One truly hidden fee comes from funds that buy and sell frequently, which brings about higher tax burdens for shareholders unless they hold the fund in a tax-deferred retirement account like an IRA or 401(k).

Then there's a bevy of smaller, irritating fees. For example, you might be charged maintenance fees for an IRA account. But plenty of companies, including Fidelity, offer no-fee IRAs. Vanguard, which charges a $20 annual fee for each fund you own that has less than $10,000 invested, waives it if you handle all transactions through its Web site and receive no paper statements or mailings of any kind.

What to do

Don't pay a load or high expenses to invest in any mutual fund, whether you're buying it directly or through a 401(k) plan. Stick to index funds, which require almost no management since they simply track market indexes, and low-cost, low-turnover managed funds from companies like Vanguard, Fidelity, and T. Rowe Price. You can limit your tax costs by selecting funds with annual portfolio turnover rates below 25 percent. Exchange-traded funds are another low-cost, tax-efficient option. Like index mutual funds, ETFs generally have low turnover rates and distribute less in capital gains to shareholders.

Bank accounts

Overdraft fees from debit cards are one of the more pernicious fees out there. A single overdraft can cost you up to $70 if not repaid within five days, according to the Consumer Federation of America. Many banks automatically enroll customers in so-called courtesy overdraft programs and then slap them with fees of about $35 per incident. If the overdraft isn't paid within a few days, a "sustained" fee might be added. But new federal rules released in November 2009 will require banks to get your permission before charging overdraft fees; they go into effect on July 1, 2010, for new accounts and Aug. 15, 2010, for existing ones.

You might also be charged a fee if you choose "debit" instead of "credit" when using your debit card at the checkout counter. And if you've opened an account with an online bank because of the generally higher interest rates it pays on deposits, you might be surprised to discover that you'll pay high fees to access your money through a teller at a walk-in branch. Online banks may levy fees for paper statements, check copies (traditional bank accounts are adding this fee as well), and ATM withdrawals above a set number.

What to do

If you're shopping for a bank, check if there are fees to open, maintain, or use your account. Ask about fees for using ATMs, automatic or online bill payments, and overdrafts. You can usually avoid opening and monthly fees by setting up direct deposit or online services. See if you need to maintain a minimum balance to avoid fees. Citibank charges $7.50 a month on two of its standard checking accounts whenever the balance falls below $1,500, even if you have direct deposit.

Avoid interest-bearing checking accounts that require you to keep a high minimum balance. If your balance drops below that amount, you'll get slapped with a fee. Besides, the interest you'll earn on such an account isn't likely to be very much, especially these days. High-yield checking accounts, also called reward checking, are the exception. They pay higher rates if you meet certain requirements, such as getting your statements online, using your debit card a certain number of times a month, and signing up for direct deposit. Go to www.highyieldcheckingdeals.com to find banks that offer these accounts.

Keep a close eye on your balance to avoid overdraft fees. Opt out of overdraft programs, and ask your bank either to deny transactions when there isn't enough money in your account to cover the purchase or to link the debit card to a savings account or credit card to cover any overdrafts. The fee for overdrawing from a linked account is generally only $5 to $10. Bank of America customers can opt out by calling 800-622-8731. Citibank doesn't allow customers to overdraw their account when using a debit card, though they can still overdraw on a check. Chase and Wells Fargo are changing the terms that apply to their overdraft programs in the next year.

Credit cards

Credit-card fees aren't so hidden because banks must disclose them in the so-called "Schumer box," which is a standard table in the terms and conditions of each credit-card agreement. Credit-card companies are beginning to eliminate overlimit fees—nasty charges averaging $39 when you breach your borrowing limit—which they're required to do starting next month as part of the Credit CARD Act of 2009. But when American Express stopped charging overlimit fees, it hiked late fees and finance charges on cash advances. Also on the rise are balance-transfer fees, international-purchase fees, and annual fees.

There are also some other fees you won't see that may still affect you. For example, "interchange fees" are paid by retailers to credit-card companies; they amount to nearly 2 percent of the purchase price and inflate the costs of things you buy.

What to do

Check the terms and conditions of a credit card online before signing up. Look to credit-union cards for lower fees. Annual percentage rates for purchases range from 9.9 percent to 13.75 percent for credit-union cards, compared with 12.29 percent to 17.99 percent for bank cards, according to a study by the Pew Charitable Trusts. Fees for late payments average about $20 at credit unions, as opposed to $39 for bank cards. And the average penalty interest rate for credit-union cards is 17.9 percent, while banks charge an average of 28.99 percent. Credit unions also tend to be more flexible about cutting penalty interest rates once you pay your bill on time for a few months.

Some retailers offer discounts if you pay in cash so they can avoid the interchange fee. They may not advertise this, so it's worth asking about. Often it's for big-ticket items like furniture, but even places like gas stations offer discounts for cash.

TV, telephone, and Internet

Cable and telephone bills are minefields of hidden fees. Cable boxes, which the companies rent to customers, may be given to you free initially, but a monthly fee can kick in after the first year. Many cable and satellite providers charge early-termination fees, and some, like DirecTV, will extend the term of your contract every time they replace or upgrade a receiver. Free trials of premium stations or higher-tier services may result in those services being automatically billed to your account if you don't cancel after a year or so.

Bundling your TV, Internet, and phone service together in a so-called "triple play" can save you money over paying for each service separately. But you can still encounter unexpected costs. Cablevision, for example, has a one-time "porting charge" for keeping your old landline number if you switch to its bundled service.

Some wireless Internet providers, like AT&T and Verizon, will also bundle a netbook, or mini laptop computer, with their Internet service. You pay a discounted price for the netbook—as low as $100—but you're locked into a contract for two years of Internet service to the tune of $40 to $60 a month. There are additional activation fees and an early-termination fee of up to $200. But the fee that might really hurt is if you breach the low limits—5 gigabytes per month—on downloads and uploads. Downloading a couple of movies could put you over that limit. Some customers, unaware of the limits, have reported charges as high as $5,000 in one month.

What to do

If you're considering a TV, phone, and Internet bundle but think you may move soon or switch services, look to a cable provider instead of Verizon or AT&T. Cable companies don't usually charge early-termination fees. If you sign up for a triple-play deal, you might be able to get the introductory rate locked in for a longer period of time and avoid installation charges. Scour the Web site of a provider you're considering for the best deals, and ask a customer rep if the price you've been given is the company's absolute best offer. Also ask for a sample bill or summary of all charges for the first few months. Confirm that the figures include all taxes, fees, and one-time expenses such as a charge to keep your existing phone number.

Try negotiating, particularly if you live in an area where there's competition between a cable provider and a telephone company, and when your promotional rate is expiring. Ask for a reduced price on installation or free extras like a premium channel. If you do get freebies, make sure you won't be billed to continue them when the introductory period ends.

The usual 5 megabits per second (mbps) download and 1 mbps upload speeds with Internet service are fine for most people, and cable and fiber Internet services sometimes beat those speeds anyway. As a rule, don't pay more for higher-speed service unless you often download large files, share a lot of lengthy videos, or do online gaming. Customer representatives love to upsell you on speeds you don't need.

Cell-phone service

Billshrink.com, a Web site that lets you compare service costs, estimates that 80 percent of Americans overpay on their cell-phone service by more than $800 million a year, or $300 a person on average. One of the biggest hidden costs is what you pay for unused minutes each month. And if you terminate your contract before it's up, you might get slapped with a hefty fee; Verizon recently doubled its early-termination fee to $350 for smartphones and other advanced devices, including netbooks.

Cell-phone companies say that many of the smaller charges on your bill are taxes and other surcharges, so there's little you can do about them. But you can avoid add-ons like insurance to cover lost, stolen, or damaged phones. Those policies typically cost about $4 to $5 a month and carry a $35 to $100 deductible, so the total cost often adds up to the price of a new phone. Some insurance plans require you to fill out a police report, and damaged phones are often replaced with refurbished ones that might not even be the same model.

What to do

You can compare prices of major carriers' plans at Billshrink.com. But some lower-cost prepaid plans are not included in Billshrink's comparison. We've found that prepaid services are often the lowest-cost option, though they do come with fees. Competition is heating up in the prepaid market. Walmart just launched its Straight Talk service offering 1,000 minutes, 1,000 text messages, and 30MB of mobile Web access for $30, or unlimited voice and data for $45 a month. Cricket, Tracfone, Boost, and MetroPCS also have competitive plans starting as low as $10 per month, or you can pay as you go.

Some new Web-enabled smart phones allow free calls by VoIP (Voice over Internet Protocol), which could cut costs for people who make a lot of long-distance or international calls. Apple iPhone users can now use Skype, an Internet phone service, over AT&T's network without incurring usage charges. Verizon's Google-platform Droid phone also may soon allow VoIP calls without triggering charges.

This article appeared in Consumer Reports Money Adviser.

Posted: January 2010—Consumer Reports Money Adviser issue: January 2010