A young man stares in confusion at a credit card statement

What is a Finance Charge on a Credit Card?

Last Updated: March 10, 2024

5 min read

Key Points:

Any fee you incur from using your credit card is considered a finance charge.
Interest, penalty fees, annual fees, foreign transaction fees, cash advance fees, and balance transfer fees are all finance charges.
Read your card’s terms and conditions to understand what finance charges you may incur and how your credit issuer calculates each fee.

When scanning your credit card statement, you may spot various fees. Any fee a card issuer charges a cardmember is considered a finance charge. According to the Consumer Financial Protection Bureau, a finance charge is the cost of consumer credit as a dollar amount. Finance charges can differ from one credit card issuer to the next and can vary based on the type of credit card you have and how you use it. Let’s look at the different kinds of finance charges and what you should know about each one.

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What are the different kinds of finance charges on a credit card?

There are different types of finance charges. Some are flat fees, while others are percentage-based fees. Your credit card company’s terms and conditions agreement should explain which fees apply to your account and how your issuer calculates them.

Interest: Interest is one of the most common finance charges. You’ll typically pay interest on balances you carry from one billing cycle to the next. You can usually avoid interest by paying your statement balance on time and in full each month, but you may pay interest on cash advances and certain balance transfers starting on the day they post to your account.
Cash advances: If you borrow cash from your credit card, you’ll likely incur a cash advance fee. Depending on the issuer, this fee may be a flat rate or a percentage of the amount you borrow. The interest rate on a cash advance is usually higher than the interest rate on purchases. And a cash advance usually begins accruing interest the day it is posted to your account. That means you’ll immediately carry a balance and may forfeit the no-interest grace period some card issuers offer if you don’t carry a balance from month to month.
Balance Transfers: Balance transfers allow you to shift your debt from one or multiple high-interest credit cards to one lower-interest card. Some credit card companies offer introductory or promotional interest rates on balance transfers and purchases. While this can help you save on interest and pay your debt off sooner, balance transfers may be costly, with balance transfer fees typically ranging between 3% and 5% of the amount transferred. Also, remember that you’ll immediately carry a balance by moving debt to a new card. So, if you don’t pay your balances in full before your promotional interest rate expires, you could lose your grace period, leaving your leftover balance subject to regular interest. To get your grace period back, you’ll need to pay off your entire balance transfer and any purchases you’ve charged to the card.
Penalty Fees: Mistakes can happen when managing your credit, but some mistakes come with penalties. For example, your card issuer may charge a late fee if you miss a payment, make a late payment, or make less than your minimum payment. And if you exceed your card’s credit limit, your issuer could charge an over-limit fee. Additionally, missing a credit card payment may prompt your credit card company to charge a penalty APR, which is higher than a regular purchase APR. And a card issuer may also charge a returned payment fee if the form of payment used to pay your credit card bill is insufficient, like a check that bounces.
Foreign transaction fees: You may pay foreign transaction fees if you use your card for purchases abroad. This fee is associated with transactions made in a foreign currency, which may also apply if you shop online with a foreign company. Because the lender must convert your U.S. dollars to foreign currency, you’re essentially paying for the additional processing. Issuers usually apply foreign transaction fees as a percentage of your purchase. Discover has no foreign transaction fee on any of our cards.
Annual fees: Some card issuers charge a yearly fee to use their credit cards, called an annual fee.

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An annual fee is the price you pay for a card’s convenience and benefits. With some cards, you may pay a monthly rather than a yearly fee. Discover has no annual fee on any of our cards.

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Can finance charges impact your credit score?

If you don’t pay them off immediately, finance charges can increase your outstanding balance and may even increase the amount of credit card debt that you owe. Your credit card debt may also impact your utilization ratio, which may affect your credit score.

Even if a finance charge doesn’t impact your credit score immediately, the reason for the charge might. For example, late or missed payments can trigger a small late fee, but the missed payment itself may negatively impact your payment history, because your payment history makes up 35 percent of your credit score, based on information from the Fair Isaac Corporation (FICO).²

How to avoid or minimize finance charges

Some finance charges are avoidable with good credit habits, proper planning, and taking advantage of promotional offers.

Pay your credit card statement balance in full every month to avoid interest or pay more than the minimum balance to lower interest charges.
Pay your minimum statement balance by the due date to prevent late payment fees.
Make large purchases or balance transfers with a low intro APR credit card to minimize interest charges.
Reduce your chances of accruing interest due to overspending by using your card issuer’s mobile app to set spending alerts.
Reserve cash advances for emergencies to limit any daily interest or cash advance fees you might pay.
Choose a credit card with no annual fee.

Credit cards offer several benefits but can come with costs in the form of finance charges. To help you make the most of your card, carefully read your card’s terms and conditions to understand the fees and interest your issuer may charge and stick to responsible credit practices.

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