What is a Finance Charge on a Credit Card?
Key points about: the different types of finance charges on a credit card
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. 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 different kinds of finance charges and what you should know about each one.
What are the different 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’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 posts 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 0% introductory or promotional interest rates on balance transfers and purchases. So you won’t owe interest or lose your grace period if you pay your balances before the promotional period ends.While this can help you save on interest and pay your debt off sooner, balance transfers may be costly, with 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 0% interest rate expires, you could lose your grace period, leaving leftover balance transfer and purchase balances subject to daily 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. If you only have a 0% intro APR for balance transfers, purchases charged to your card will incur interest before the promotional period ends.
- 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 some card issuers 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.
- Annual fees: Some card issuers charge a yearly fee to use their credit cards, called an annual fee.
- 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.
Can finance charges impact your credit score?
If you don’t pay them off immediately, finance charges can increase your balance and the overall amount you owe across all your revolving credit accounts, which accounts for 30 percent of your credit score. If the fee is small, it may not impact your score much, but if it’s high enough to increase your balance substantially (like a percentage fee on a large balance transfer), you may take a hit on your score.
And if a finance charge doesn’t hurt your credit score, 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, accounting for 35 percent of your credit score.
How to avoid or minimize finance charges
Some finance charges are avoidable with good habits, proper planning, and 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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