A finance charge is a cost incurred due to the use of credit, such as credit cards. It is also known as a loan fee, interest charge, or annual percentage rate (APR). The finance charge is usually expressed as a percentage of the amount borrowed and is included in your monthly payment. In some cases, it may be charged separately.

The finance charge can be calculated in one of two ways:

Finance Charge Calculation Method 1

Under this method, the total cost of credit for an item can be determined by adding all the fees and interest charges for that item into one sum. This sum is then divided by the number of payments to arrive at an average cost per payment. The average cost per payment then becomes the finance charge for that specific billing period.

Finance Charge Calculation Method 2

The finance charge is computed by dividing the amount financed by the number of payments or installments scheduled to repay that amount. It’s calculated by taking how much you borrowed and multiplying it by how much interest you’ll pay over time divided by how many payments you’ll make to pay off your debt over time.

How does the finance charge affect your credit?

The finance charge credit card companies charge what is used to determine your credit card’s interest rate. The higher the finance charge, the higher your interest rate. So if you have a $500 balance on a credit card charging 15% interest with a finance charge of $25, and you make only the minimum payment each month, it will take you nearly nine years to pay off that balance in full and cost you almost $1,000 in interest alone.

What are some tips for avoiding high finance charges?

As experts at SoFi point out, “If you pay off your credit card balance in full when it’s due, or you’re paying your balance during a 0% interest rate promotion, then you won’t accrue any finance charges.” So, if possible, pay off your entire credit card balance each month. If that’s not possible, try to pay at least the minimum amount required to avoid incurring late fees and penalty rates. When making payments on your credit card bill, send as much as possible toward the principal balance on your account to reduce the interest you’ll owe.

How does the annual fee affect your credit?

Annual fees are designed to recoup some of the money that credit card companies lose when their customers carry a balance from month to month. Credit card firms make money by charging interest on your outstanding balance, so they lose money if you pay in full each month.

In conclusion, credit card companies have strong financial incentives to charge as much interest as possible. It’s up to you to fight back. The first step is to avoid paying interest by paying your credit card bill in full each month.

If that’s not possible, pay at least the minimum amount required to avoid interest charges and late fees. The key is not to carry a credit card balance monthly because the extra costs will quickly add up and cost you a lot of money over time.