What Are Finance Charges on Credit Cards?

Learn about the different types of finance charges that can be applied to your credit card account, and how to avoid them.

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Introduction

Finance charges are fees that credit card companies charge for carrying a balance on your card and for using various credit card services. The three main types of finance charges are interest charges, late payment fees and over-the-limit fees.

Interest charges are the most common type of finance charge. Credit card companies charge interest on the outstanding balance on your card every month. The interest rate that you’re charged will depend on the type of card that you have and your credit history.

Late payment fees are charged if you don’t make at least your minimum payment by the due date. These fees can be as much as $35 for the first late payment and $30 for subsequent late payments within six months.

Over-the-limit fees are charged if you exceed your credit limit in a billing cycle. These fees are typically $25 for the first time you go over your limit and $35 for subsequent times within six months.

Finance charges can add up quickly, so it’s important to understand how they work and how to avoid them. Read on to learn more about finance charges and how to avoid them.

What is a finance charge?

A finance charge is the cost of credit on your credit card account. It includes interest, service charges, and other fees you may be charged for using your card. The finance charge is computed by applying a periodic rate to the average daily balance of your account. The periodic rate is a percentage rate that’s applied to the balance once every billing period.

Your credit card issuer must give you 45 days’ advance notice of any change in the periodic rate or annual percentage rate (APR). If there’s a change in an introductory APR, you must be given written notice and at least 21 days’ notice before the change takes effect.

To avoid paying interest on your purchases, you must pay your entire balance by the due date each month. If you don’t, you’ll be charged a finance charge on the outstanding balance.

You can generally avoid finance charges by paying your entire balance every month. But if you carry a balance from month to month, you’ll be charged a finance charge on that outstanding balance. The amount of the finance charge will depend on your APR and the outstanding balance on your account.

How is the finance charge calculated?

Every credit card issuer has its own method for calculating finance charges, which may be based on your outstanding balance, average daily balance, or some other factor. The credit card agreement should explain how the issuer calculates finance charges.

You can avoid finance charges by paying your entire balance before the due date each month. If you carry a balance from one month to the next, you will usually have to pay a finance charge.

Some cards have a grace period during which no finance charges are assessed if you pay your entire balance when it is due. However, if you carry a balance on the card from one month to the next, you will usually have to pay a finance charge.

How can you avoid finance charges?

Here are some tips to avoid finance charges:
-Pay your balance in full and on time every month.
-Keep your credit card balance low.
-Avoid using your credit card for cash advances.
-Read your credit card statement carefully.

Conclusion

Finance charges are the fees that credit card companies charge for the use of their cards. These fees can be very costly, so it is important to understand how they work before using a credit card.

There are two types of finance charges: fixed and variable. Fixed finance charges are set annually and do not change with your balance or interest rate. Variable finance charges, on the other hand, are based on your current balance and interest rate. If these rates increase, so will your finance charges.

You can avoid finance charges by paying your balance in full each month, but this is not always possible. If you do carry a balance on your credit card, be sure to shop around for the card with the lowest finance charges.