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What are Finance Charges in Credit Cards? - Finance Charges 101

Updated on: 14 Dec 2021 // 27 min read // Credit Cards
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What are Finance Charges in Credit Cards? - Finance Charges 101

If you are wondering what is finance charges in credit card and how you can control your charges related to your credit cards, here is everything that you need to know.

Are you quizzed by the deduction of some charges due to your credit card? Are you wondering what these charges are and how they can be reduced? Well, before understanding how finance charges are calculated and how you can reduce them, it is important to understand what exactly they are and how they are related to your credit card. Read on to find out.

What is Finance Charge?

Finance charge refers to the fee that is usually charged for the use of your credit cards. It can either be a percentage or a flat fee. Finance Charge refers to the cost that is linked with the transaction fees, account maintenance fees, or other penalty charges that are imposed by the lender.

Finance charges can turn out to be 25% or more on a yearly basis. The amount depends on the usage of the card by the cardholder.

Finance charges can be referred to as compensation that is offered to the lender for providing the funds and extending credit to the borrowers. These charges can be one-time fees, penalty fees, or a loan, and organization fees which can be calculated either on a daily or a monthly basis.

An interest rate as a finance charge is assessed as per the use of the credit of the existing credit card. A very common finance charge is the interest rate. 

It is not uncommon for many to wonder what is finance charges in credit cards and how they are calculated. Simply remember that as far as credit cards are concerned, finance charges are calculated in the currency that the card functions in. It also allows the borrowers to complete a transaction in foreign currency when the card is used internationally.

Any amount you pay that is beyond the amount you borrowed from a lender is considered to be a finance charge. One of the advantages that you can have if you have credit cards is that you can borrow money without having to pay your balance every month. However, you have to pay a penalty charge while repaying your debt.

How is Credit Card Finance Charge Calculated?

Credit cards are the most common ways that consumers obtain credit. One of the advantages that credit card owners enjoy is that they do not have to pay off the amount they borrowed every month in a full manner. However, If you take more time than the limited period considered to be a deadline and you fail to pay within the grace period, a penalty fee has to be paid as the finance charge.

The finance charges that affect your credit card depending on a lot of factors. The major factor that it depends on is your Annual Percentage Rate, also known as the APR. It is related to your debt and the amount of time taken to pay back your dues during the billing cycle.

Most credit card users tend to figure out their finance charges by using the average daily balance method and save a lot of money eventually.

  • The annual percentage rate is generally divided into 360 certain cases or 365 cases, depending on the cardholder. The APR focuses on determining your daily interest rate. For instance, if a credit card APR remains around 17%, it would translate to a 0.50% daily interest rate.
  • Your daily interest rate tends to be multiplied by the number of days taken in the billing cycle to determine your interest rate for the finance charge. For instance, if you have 30 days in the billing cycle, and the APR is 18%, then it will eventually turn into an interest rate of 2% for the final billing statement.
  • Another point to keep in mind if you are wondering what a finance charge is and how it affects your credit card is the final finance charge percentage multiplied by the amount of debt depending on your APR.
  • Different banks have different procedures to calculate their finance charges depending on the credit card holders' actions. For example, let us see what is finance charges in HDFC credit card and how they calculate them. HDFC levies finance charges on an MPR (Monthly Percentage Rate). Likewise, the State Bank of India allows its customers a period of 20 to 50 days to pay their finance charges. ICICI Bank, on the other hand, follows a process similar to that of the HDFC Bank.
  • Any billing error that takes place will not be assessed as a finance charge. 

It is also important to note that mini credit cards also have promotional interest rates. These rates tend to be charged along with the APR linked to cash advances.

How can you Avoid or Reduce your Credit Card Finance Charges?

Once you understand what is finance charges in credit card and how it is calculated on the basis of the different factors, it is important to understand what you can do to reduce finance charges. 

The easiest option for you would be to not charge anything on your credit cards and not use it for any purpose, which is not a convenient method when it comes to the real scenario.

  • The practical option to reduce your finance charges would be to pay your credit card bills on time, every month, and in full. This way, you will not have to pay any extra finance charges.
  • Make sure you pay before the grace period gets over. Most of the banks provide the customers with a grace period ranging between 20 days to 40 days. You should know your grace period from your bill statement and pay your credit card balance to avoid paying finance charges.
  • Another way to pay less to no finance charges would be to look for credit cards that come with 0% appearing for limited amounts of time. Most of these offers tend to expire after 12 months. Due to the high competition in the finance industry, more such offers are coming up in the market. If you already have a credit card that offers 0% intro APR, then you can easily avoid paying extra finance charges.
  • Keep track of the card's promotional period as that is a time when you will not be levied with any finance charges. Once the promotional period ends, finance charges need to be paid by the cardholders.Now that you know what are finance charges in credit cards and how they are calculated on the basis of the extension of existing credit, you will understand how beneficial it will be for you to avoid paying extra charges in this manner. The average percentage that is charged as a finance charge by most of the banks remains around 15% to 20%. It is a huge amount if you do not pay your credit balance strategically. Therefore, take your time to analyze and understand what is a finance charge, how it affects your balance and how you can avoid paying extra charges by paying your credit balance regularly.

FAQs

✅1. What is a Payday Loan?

A payday loan is a short-term loan where the lender can extend high-interest credit based on their income.

✅2. What is the lowest percentage that is charged as a Finance Charge?

It varies from one bank to the other. Generally, the lowest charge remains around 1.2% per month.

✅3. What are various ways in which Finance Charges are calculated?

The major four ways in which Finance Charges are calculated are two-cycle billing methods, previous balance method, daily balance method, and average daily balance method.

✅4 Why are finance charges so high?

If you do not pay your credit balance every month within the grace period, the finance charges tend to go higher. Banks make money off of these charges, and they know smaller loans can be paid off quickly. Therefore, finance charges are generally higher when it comes to smaller loans.

✅5. What is the easiest way to avoid finance charges?

Make sure you pay your credit balance every month in full within the grace period to avoid paying finance charges.