What is a Credit Card Setup Fee? How the Charge Can Reduce Issuer Risk and Costs

Anyone can apply for a credit card. In fact, part of my wardrobe in college consisted of free T-shirts I got from filling out applications at concerts and sporting events. But applying is just the first hoop you have to jump through before you can use a credit card. 

And if the issuer approves your application and sends your card, you may have a final hoop to jump through: paying a setup fee. Some credit cards charge a setup or activation fee before you even start using the card.

Issuers charge setup fees, or activation fees, that must be paid before you can start using your new credit card.

Secured credit cards and cards for people with low credit scores often charge setup fees to cover activation costs or simply to cover some of their risk.

Thankfully, I wasn’t approved for any of the cards I applied for early in my college career, but I’ve learned plenty since then and can provide some wisdom about setup fees and how to avoid them.

You’re not alone in wondering why credit card issuers charge setup fees. After all, if you haven’t even started using your card yet, why should you have to pay a fee?

So let’s take a look at why they charge these fees and how they may help issuers extend credit to people with poor credit.

Administrative Costs

Setup fees help credit card issuers cover the costs of creating and managing credit card accounts. Issuers check your credit before they issue a card to get a better picture of your credit history. 

A setup fee may help card issuers pay for the costs of credit checks and documentation processing expenses they incur while reviewing your background information.

Risk Management

In a perfect world, we’d all have lots of money and excellent credit. Unfortunately, this isn’t a perfect world. A quick scan of national news headlines will tell you that much.

When a credit card is issued to someone with bad credit, the issuer is taking a risk. The person may have a history of not repaying their debts, which may indicate that they won’t repay their debts again.

A setup fee may act as a type of insurance policy for the credit card issuer. If a borrower ends up defaulting, meaning they fail to make a payment on the card’s balance for an extended period of time, the setup fee may at least provide the issuer with some compensation. 

Revenue Generation

Credit card companies provide us with valuable financial tools. On a practical level, I think it’s much easier to carry around one credit card than a wad of cash to pay for things. 

Credit cards also allow us to buy things today on credit and pay for them later, which can be especially helpful if you’re running low on funds.

But let’s face it, credit card companies couldn’t exist if they didn’t make money. By charging a setup fee to cardholders, credit card companies ensure they receive at least some revenue from all of their cardholders. Even if someone ends up not being their best customer, they still have some skin in the game with their setup fee.

Credit cards come in all shapes and sizes — not literally, of course. I know I wouldn’t be too thrilled if my credit card issuer sent me a new card in the shape of a crescent moon or a four-leaf clover. 

But different credit cards come with different fees. Not every credit card charges a setup fee. In this section, we’ll take a look at the types of credit cards that may charge these fees.

Secured Credit Cards

Secured credit cards require cardholders to deposit cash with the company issuing the card. The deposit serves as collateral on a cardholder’s credit card account. In the event the cardholder misses a payment due date for their credit card, the card’s issuer can use the deposit to cover the amount of the missed payment.

The credit limit for a secured credit card equals the amount of money a cardholder has deposited with their issuer. For example, if a secured credit card requires you to make a $1,000 deposit to open the card, then your credit limit for the card will also be $1,000.

Secured credit cards can come with more fees than unsecured cards, including a setup fee. Since secured credit cards function differently than unsecured cards, essentially using cash you’ve already given to the card issuer, you may be wondering what the point of a secured credit card is. 

A debit card allows you to conveniently use your own funds, so isn’t that basically the same thing? Not necessarily. A secured credit card relays a cardholder’s activity to agencies that report on consumer credit. 

Since you’re only using your own money, debit cards don’t help you build credit. So, if you have bad credit but you’re looking to improve it, a secured credit card may be a helpful payment tool for you. 

Subprime Credit Cards

Subprime borrowers are consumers who generally have bad credit. Credit card issuers expect subprime borrowers to be more likely to miss payment due dates than borrowers with good or excellent credit.

If you have a low credit score, you may find that credit card issuers aren’t exactly falling all over each other to offer you a credit card. So, if you’re set on having a credit card, then a subprime credit card may be your only option.

Subprime credit cards may charge more fees than other types of credit cards, including a setup fee. Their interest rates are typically high as well. Fees and high interest rates help subprime credit card issuers protect themselves against the risk of extending credit to subprime borrowers. 

If you’re in the market for a new credit card, it’s always a good idea to understand the fees a card issuer plans to charge you before applying. This will help you avoid surprise fees and make informed decisions about which credit card (or cards) to apply for. 

Review Your Cardholder Agreement

A company designs its marketing efforts, including television commercials, online ads, promotions, and sponsorships, to entice you to use its products or services. But you can’t rely on a company’s marketing materials to tell you the whole story. 

Bob Dylan once sang, “Advertising signs they con you into thinking that you’re the one / that can do what’s never been done / that can win what’s never been won.” Even though he first sang those lyrics in the 1960s, they’re probably even more true today.

Fortunately, credit card issuers must disclose information about fees in their cardholder agreements. I recommend you take a close look at the terms and conditions of using your credit card so you understand how an issuer calculates fees and when payments are due. 

A setup fee, which may also be disclosed as an activation fee, will be included plainly in your cardholder agreement, so you can look past the ads and fluff. 

Compare Card Offers

Comparison shopping involves researching numerous options to discover the product or service that best fits your needs and budget. Though it can be time-consuming, comparison shopping may help you save money and avoid buying products you don’t need.

We live in an age when comparison shopping is easier than ever. If you’re reading this article, then you may be comparing the fees credit cards charge now. You’ve already found a trusted resource that can help you compare credit card offers and the fees associated with cards — that’s what we do here at CardRates.

Sites like ours have plenty of credit card reviews you can peruse to learn more about card features and compare them. Take time to review all the card offers you qualify for and learn about the fees, including setup fees, that different cards charge. Trust me, you’ll be glad you did.

No one likes fees, and even small fees can add up over time and put a big dent in your finances or credit limit. Let’s take a closer look at the impact of setup fees.

Initial Cost 

When credit card issuers charge a setup fee, it makes obtaining the card more expensive. Some cards also charge an annual fee, which also increases your costs out of the gate. Thankfully, some card issuers waive the annual fee during the first year of card ownership.

If you have limited funds, a setup fee may be something you want to avoid. To help you manage your budget, write down all of a card’s fees before applying for it.

Effect on Credit Limit

If you’re looking for a new credit card to boost your purchasing power, know that a setup fee may lower your available credit until you pay it back. Since the setup fee is only charged once, this shouldn’t be an ongoing issue, but it will impact you temporarily. 

I want you to have all the information you need, so you won’t be surprised by having less purchasing power than you expected.

If you take one thing away from this article, I hope it’s a better understanding of credit card setup fees. Some cards call them an activation fee, and just like with smartphones, it is an upfront investment to gain access.

In addition to setup fees, annual fees, and interest rates, make sure you understand everything a credit card issuer plans to charge you. After comparing cardmember agreements and maybe visiting comparison sites like ours, you’ll be well-informed and in a great position to apply for a credit card.