What is a Credit Card Finance Charge?

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A finance charge is any charge associated with using credit. In the language of the law more specifically, the Truth in Lending Act a finance charge is the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit.

 When your card issuer sends you your monthly statement, it lists any finance charges along with your purchases and payments. How your finance charge shows up on your statement will depend on your card issuer. For example, it might be listed in a separate finance charge category, or the statement might just list all the components that make up a finance charge right in with your purchases and other activity.

Top 4 Types of Credit Card Fees

1. Finance Charges

In exchange for the right to carry a balance on a credit card, issuers charge you interest, also referred to as annual percentage rate (APR). How your credit card’s APR is calculated is based on several factors including the interest rate range offered on that particular card and your creditworthiness.

Think of an annual fee like any other membership privilege. A credit card essentially gives you the right to buy something now and pay for it later. That’s because unlike cash or a debit card, a credit card allows you to revolve a balance, paying your purchase off over time. Of course, if you choose to carry a balance, in most cases you’ll also have to pay interest

2. Annual Fees Charges

Some cards will also grant you perk like elevated rewards rates, extended warranty protections or airport lounge access. If you use these extras, it can sometimes be worth more than the price you’ll pay annually to own the card.

3. Balance Transfer Fees

Sometimes you can save money by shifting high-interest debt to a card with a low or 0% APR. When you transfer a balance from one card to another, you’ll typically be charged a balance transfer fee of 3% to 5% of the amount being transferred. This will add more to your existing debt so it’s worth doing the math to make sure you’re going to be saving money overall.

4. Late Fees

If you miss making at least the minimum payment on your credit card by the due date, you could be subject to a late fee. Not all cards will charge you for a late or missed payment, but if you have a card that does, it can add an extra sum to your balance. If you have late or missed payments, your credit score will likely be impacted.

Even if your credit card doesn’t explicitly charge a late fee for a late or missed payment, some cards will charge you a penalty APR, which is typically higher than your card’s current variable APR. This penalty APR may last for a specified number of months until you’ve made consistent on-time payments or indefinitely. The penalty APR will make any debt you carry on your card even more expensive and can potentially cost you even more than a late fee would.

What is Finance Charge?

Finance charge refers to the fee that is usually charged for the use of your credit cards. It can either be a percentage or a flat fee. Finance Charge refers to the cost that is linked with the transaction fees, account maintenance fees, or other penalty charges that are imposed by the lender.

Finance charges can turn out to be 25% or more on a yearly basis. The amount depends on the usage of the card by the cardholder.

Finance charges can be referred to as compensation that is offered to the lender for providing the funds and extending credit to the borrowers. These charges can be one-time fees, penalty fees, or a loan, and organization fees which can be calculated either on a daily or a monthly basis.

How is Credit Card Finance Charge Calculated?

The finance charges that affect your credit card depending on a lot of factors. The major factor that it depends on is your Annual Percentage Rate, also known as the APR. It is related to your debt and the amount of time taken to pay back your dues during the billing cycle.

  • The annual percentage rate is generally divided into 360 certain cases or 365 cases, depending on the cardholder. The APR focuses on determining your daily interest rate. For instance, if a credit card APR remains around 17%, it would translate to a 0.50% daily interest rate.
  • Your daily interest rate tends to be multiplied by the number of days taken in the billing cycle to determine your interest rate for the finance charge. For instance, if you have 30 days in the billing cycle, and the APR is 18%, then it will eventually turn into an interest rate of 2% for the final billing statement.
  • Another point to keep in mind if you are wondering what a finance charge is and how it affects your credit card is the final finance charge percentage multiplied by the amount of debt depending on your APR.
  • Different banks have different procedures to calculate their finance charges depending on the credit card holders’ actions. For example, let us see what is finance charges in HDFC credit card and how they calculate them. HDFC levies finance charges on an MPR (Monthly Percentage Rate). Likewise, the State Bank of India allows its customers a period of 20 to 50 days to pay their finance charges. ICICI Bank, on the other hand, follows a process similar to that of the HDFC Bank.
  • Any billing error that takes place will not be assessed as a finance charge. 
  • It is also important to note that mini credit cards also have promotional interest rates. These rates tend to be charged along with the APR linked to cash advances.

How to Avoid a Credit Card Finance Charge

  1. Simply put, all you have to do is pay your credit card bill in full and on time. If you’ve already made a habit of doing this – great job! You may not have even seen a finance charge to your account.
  2. Paying each bill on time has a ton of benefits. For one, you get to avoid late fees and a penalty APR. On time payments also help your credit and show potential lenders that you have responsible credit habits. Some credit card issuers may even offer rewards for consistently paying on time.
  3. Paying your credit card bill in full also has its benefits, mostly in saving you money. Paying your bill in full means you aren’t left with an account balance. A $0 balance won’t earn interest, so you get to avoid the finance charge.
  4. To stay on top of your credit card charges, always be aware of your due date and whether or not you have a grace period. A grace period is the time between your statement is mailed out and your due date. Often this grace period lasts about 25 days. As long as you pay your bill during this time, you can successfully avoid a finance charge.

How to clear Credit Card dues with Personal Loan?

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