What is a credit card finance charge?

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Credit cards come with many rates and fees that cardholders should be aware of, and at the top of the list are finance charges. This is one of the most common fees associated with every credit card, but many cardholders don’t know what it is or how it affects the amount they pay each month.

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Unfortunately, cardholders who do not bother to learn the definition of finance charges make themselves vulnerable to these same charges. The definition of a finance charge is, quite simply, the interest you pay on a debt you owe. With respect to credit cards, if you carry a balance from one payment period to another, you will be charged finance charges – or interest – on that remaining balance..

Here’s an overview of what this guide to credit card financing fees will cover:

  • Definition of financial charges

  • Interest against financing fees

  • How Credit Card Funding Fees Are Calculated

  • Factors that affect finance charges

  • How to avoid paying finance charges

Definition of financial charges

The finance charges of a credit card are the interest charges 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 are unaware of finance charges until they purchase an item. When they allow a portion of their balance to roll over to the next month, the fee goes into effect.

Finance charges act like a convenience fee – a penalty the credit card company charges for not making you pay your balance in full each month. In short, as long as you keep a balance, you will face finance charges.

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Interest against financing fees

Interest is a type of finance charge that cardholders have to pay if they carry a balance on their credit cards. Finance charges may also include other transaction costs in addition to interest, including account maintenance fees and late fees in addition to interest. Interest rates vary between cardholders and card issuers, and finance charges vary accordingly.

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How Credit Card Funding Fees Are Calculated

Unlike a mortgage or car loan that has a predetermined repayment plan, the cost of credit card financing can change from month to month. The finance charge is usually calculated by dividing your APR by 365. Then you multiply the resulting credit card rate by your outstanding balance. Unfortunately, this is where the generalities end.

Depending on the company, your finance costs may be calculated using one of the following methods:

  • Average daily balance: The most commonly used method is the daily balance sheet. It takes the average of your balance during the billing cycle, adding up each day’s balance and dividing it by the number of days in the billing cycle.

  • Daily balance: The daily balance method uses the credit card balance of each day in your billing cycle, then multiplies each day’s balance by the daily rate. Then all the days are added up to get your load.

  • Closing balance: The closing balance method takes your opening balance and subtracts the payments plus fees made throughout the billing cycle.

  • Previous balance: The previous balance method pulls your balance at the start of the billing cycle – which is the same as the ending balance of the last billing cycle – but charges and payments during the bill cycle do not affect the calculation of charges. financial.

  • Adjusted balance: This method uses the balance you have at the start of the billing cycle and then subtracts any payments you make throughout the month. This calculation method is generally the cheapest for cardholders.

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Factors that affect finance charges

Several factors can affect the finance charges that consumers pay. The first – and arguably the most important – is the interest rate. Individuals who benefit from the lowest interest rates pay less finance charges than those who pay higher interest rates. By lowering their interest rates, consumers can reduce their payments.

To benefit from the lowest interest rates, consumers must take steps to improve their credit rating. They may need to pay off their debts, create a budget to pay their bills on time, and make a habit of checking and correcting their credit reports regularly. Not only that increase credit score, but it also helps establish better financial practices.

Other factors that affect finance charges include when credit holders pay the bill and when they use their cards. Banks include late fees and foreign transaction fees in finance charges. Missing payments or paying for expenses while on an international vacation can increase finance charges.

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How to avoid paying finance charges

To avoid paying finance charges, cardholders must first understand which actions incur charges. Those who do not pay their balance in full each month still pay a financial burden for the privilege of carrying the debt. If the balance cannot be paid, cardholders may be able to take advantage of an offer to transfer balances to another card with a promotion of 0% APR.

However, carrying a balance is not the only way to accumulate finance charges. Some card issuers charge fees for balance transfers, cash advances, and purchases in foreign countries. Those who do not want to pay these fees should avoid the activities that trigger them. For example, a cardholder who travels internationally frequently may want to find a card that carries no foreign transaction fees.

When looking at your credit card billing statement, finance charges are something you want to take a close look at to make sure you’re being billed correctly for any outstanding balances. Examining these fees also helps you determine how much extra you will need to pay to eventually eliminate your credit card debt.

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Last updated: October 12, 2021

This article originally appeared on GOBankingRates.com: What is a credit card finance charge?

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