A credit card finance charge is the interest charged on a credit card balance and any other fees associated with borrowing money. Unfortunately, cardholders who don’t bother learning the definition of a finance charge leave themselves vulnerable to those very charges.
In this guide, we will breakdown everything you need to know about a credit card finance charge.
Finance Charge Definition
A credit card’s finance charge is the interest fee charged on revolving credit accounts. It is directly linked to a card’s annual percentage rate and is calculated based on the cardholder’s balance.
Most cardholders aren’t aware of finance charges until they purchase an item. When they allow a portion of their balance to carry over to the next month, the charge kicks in.
Finance charges act as a convenience charge of sorts — a penalty that the credit card company imposes for not forcing you to pay your balance in full every month. In short, as long as you carry a balance, you will face a finance charge.
Factors That Affect Finance Charges
Several factors can affect the finance charges that consumers pay. The first — and arguably the most significant — is the interest rate. Individuals who qualify for the lowest interest rates pay less in finance charges than those who pay higher interest rates. By lowering their interest rates, consumers can lower their payments.
To qualify for the lowest interest rates, consumers must take action to improve their credit scores. They may need to pay down debt, create a budget so they pay bills on time and develop a habit of checking and correcting their credit reports regularly. Not only does this boost the credit score, but it also helps establish better financial practices.
Other factors that affect finance charges include when credit holders pay the bill and where they use their cards. Banks include late fees and foreign transaction fees in the finance charge. Missing a payment or paying for expenses while on an international vacation can increase the finance charge.
How to Minimize Credit Card Finance Charges
It can be tough to avoid finance charges altogether, but there are ways to minimize them:4,5
- Pay off your balance in full each month before your grace period ends to avoid interest charges.
- Use a 0% interest credit card.
- Avoid cash advances.
- Use a card with no balance transfer fees.
- Use a no foreign transaction fee credit card when making international purchases.
- Use a no annual fee credit card.
Always Read the Fine Print
If you use a credit card, understanding what costs are associated with your account is essential. Because finance charges encompass interest and transaction fees, take the time to read the fine print on card fees and interest charges and when they come into play.
Once you have an idea of the various finance charges that accompany your card, you’ll be better equipped to know how to avoid them.