Finance Charge Definition
One of the perks of having a credit card is that you don't have to pay off your balance in full every month, but taking your time comes at a price. If you delay paying off your credit card balance, your issuer will charge a fee to your account for the convenience of taking your time rather than paying your balance right away. This fee is known as a finance charge, and is calculated by the amount of interest you owe on your debt (the money you've borrowed and have not yet paid back).
As of 2019, Americans were $14.15 trillion in debt, 26.8% higher than in 2013. Almost 4.7% of outstanding debt was in some stage of delinquency and of the $669 billion of debt that is delinquent, $444 billion is seriously delinquent, at least 90 days late.
With these kinds of numbers, consumers need to be aware of the finance charges that can apply to any balance carried beyond a cardholder's designated grace period. You can avoid such fees, and avoid being delinquent, by paying your bill on-time and in-full each month.
When Are Finance Charges Assessed?
Your credit card issuer will send you a bill for your charges every 24 to 29 days based upon your specific billing cycle. On the last day of this cycle, your credit card issuer takes into account all the activity on your account—including transactions, payments, fees, and credits—to calculate your finance charge, which is then added to your balance and carried into your next billing cycle.
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
Any billing errors that you've disputed in writing won't be assessed as a finance charge while your credit card issuer investigates your dispute.
How Much Is a Finance Charge?
Finance charges are calculated each billing cycle based upon the current prime rate (which as of 2020 stands at 3.25%, this rate can fluctuate), your credit card interest rate, and credit card balance. Your potential finance charge will vary each month.
Creditors have different methods for determining finance charges based upon how they calculate your balance. Credit card issuers may calculate finance charges 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've paid off in a previous billing cycle.
Your credit card agreement may also include a minimum finance charge that's applied anytime your balance is subject to a fee. 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 cents, you'll be charged a $1.00 finance charge for that month.
Where to Find Your Finance Charge
Finance charges can be 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 any finance charges, 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 list of your finance charges by the type of balances you're carrying. For example, if you have a purchase 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 a Finance Charge
Making your minimum credit card payment (the one typically 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 the 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.
Lowering Finance Charges
Since your finance charge is based on your interest rate and credit card balance, you'll pay higher finance charges as these amounts grow.
You can reduce the amount of interest you pay by reducing your balance, requesting a lower interest rate, or moving your balance to a credit card with a lower interest rate.
You can avoid finance charges altogether by paying your entire balance before the grace period ends each month.