Finance Charge Definition
One of the perks of having a credit card is that you don't have to pay off your full balance right away. But, there's a cost to taking your time in paying off your balance. If you take your time paying off your credit card balance, your credit card issuer will charge a fee for the convenience of taking your time rather than paying your balance right away. This fee is called a finance charge and is simply an interest fee charged on money you've borrowed.
Finance charges usually apply to any balance carried beyond the grace period. You can generally avoid paying a finance charge by paying your entire balance before the grace period ends.
When Are Finance Charges Assessed?
Your credit card issuer sends you a bill for your charges every 24 to 29 days based on your billing cycle. On the last day of your billing cycle, your credit card issuer takes into account all the activity on your account - transactions, payments, fees, and credits - to calculate your finance charge. Then, your credit card finance charges is added to your balance and billed to you.
You'll be charged a finance charge whenever:
- a transaction isn't made under a 0% interest promotion
- you had a balance at the beginning of the billing cycle
- the transaction doesn't receive a grace period, usually cash advances
Any billing errors that you've disputed in writing won't be assessed a finance charge while your credit card issuer investigates your dispute.
How Much Is the Finance Charge?
Finance charges are calculated each billing cycle based on your APR (your interest rate) and credit card balance, so your exact finance charge will typically vary from month to month.
Creditors have different methods of calculating finance charges based on how they calculate your balance. Credit card issuers may calculate your finance charge using your daily balance, an average of your daily balance, the balance at the beginning or end of the month, or your balance after payments have been applied. It's now illegal for credit card issuers to charge a new finance charge on a balance you paid off in a previous billing cycle.
If your credit card issuer uses the average daily balance method to calculate your finance charge (check your credit card statement or terms and conditions to confirm), you can use these instructions to estimate your finance charge. You'll need to have an idea of what your average credit card balance will be.
Your credit card agreement may include a minimum finance charge that's charged anytime your balance is subject to a finance charge. For example, your credit card terms may include a $1.00 minimum finance charge. If your calculated finance charge for a particular billing cycle is only $.65, you'll be charged a $1.00 finance charge for that month.
Where to Find Your Finance Charge
You'll see your finance charge listed in several places on your monthly credit card billing statement. On the first page of your billing statement, you'll see an account summary listing your balance, payments, credits, purchases, and the finance charge, which may also be referred to as an "interest charge."
In the breakout of transactions made on your account during the billing cycle, you'll see a line item for your finance charge and the date the finance charge was assessed.
In a separate section that breaks down your interest charges, you'll see a break down of your finance charges by the type of balances you're carrying. For example, if you have a purchases balance and a transfer balance, you'll see details of the finance charges for each. This is because these balances often have different interest rates and grace periods.
How to Pay Off Your Finance Charge
Making your minimum credit card payment, which is printed on the first page of your credit card billing statement, is usually enough to cover your finance charge plus a small percentage of the balance. However, if you're only paying the minimum payment, your balance will shrink by only a small amount each month since so much of the payment goes toward paying interest. You'll need to increase your minimum payment substantially if you want to pay off your balance faster.
If, for some reason, your minimum payment is less than your finance charge, paying the minimum will result in a bigger, not smaller, balance.
Can You Lower Your Finance Charge Amount?
Since your finance charge is based on your interest rate and credit card balance, you'll pay higher finance charges when these amounts are high.
You can reduce the amount of interest you pay by paying off your balance faster, requesting a lower interest rate, or by moving your balance to a credit card with a lower interest rate.
You can also avoid finance charges altogether by paying your entire balance before the grace period ends. If you pay your balance in full each month, you'll avoid finance charges completely.