What is a Finance Charge on a Credit Card?

Imagine lending a significant amount of money to a stranger. You’d probably want some kind of extra compensation or collateral to justify the risk, right? Now, imagine you’re a credit card company extending credit to millions and millions of people, despite the chance that some card members will fail to make their payments.

Enter the “finance charge.”

Most credit cards come with finance charges, largely to compensate the lender for the risk of non-payment. But what exactly do finance charges include, how are they calculated, and can they be avoided?

The definition of a finance charge is interest charges or other costs associated with using credit. For credit cards, these charges typically include interest, but may also include other fees, charges, and penalties associated with using the card.¹

When your card issuer sends you your monthly statement, it lists any finance charges along with your purchases and payments. How your finance charge shows up on your statement will depend on your card issuer. For example, it might be listed in a separate finance charge category, or the statement might just list all the components that make up a finance charge right in with your purchases and other activity.

Finance charges include any fees paid to the lender, such as:²

• Interest
  
  
• Annual fees
  
  
• Foreign transaction fees
  
  
• Cash advance fees
  
  
• Late payment fees
  
  
• Balance transfer fees

The most common type of finance charge is interest. Other credit card finance charges include annual fees or late fees. Fees or interest charges for cash advances, balance transfers, or foreign transaction fees could be considered credit card finance charges too.

While the term “finance charge” is typically used in the context of credit cards, other forms of credit—personal and auto loans, or mortgages—may have finance charges, too. With any kind of credit, finance charges help lenders cover the nonpayment risk of extending credit and give them a way to make a profit on the use of their money.³

With loans and mortgages, finance charges can include a one-time loan origination fee as well as interest payments.

Since your finance charge depends on multiple factors, including the account balance and your card’s interest rate, it will typically vary from month to month. Each charge is calculated separately, based on the rules in your card member agreement.

By way of example, say you didn’t pay off your credit card balance in full by the end of the grace period. You also withdrew a cash advance and made a few foreign purchases this month. Depending on your credit card’s terms, your finance charge might include:

• Interest. Including interest accrued from carrying a balance
  
  
• A cash advance fee or charge, as well as interest charges on the cash you withdrew
  
  
• Foreign transaction fees

While finance charges themselves are unlikely to impact your credit score, they could have an indirect impact on it. Paying finance charges on time could help to bring down your credit card balance, something that could have a positive impact on your credit score.⁴

It can be tough to avoid finance charges altogether, but there are ways to minimize them:^5,6

• Pay off your balance in full each month before your grace period ends to avoid interest charges on the purchase balance. Keep in mind, however, that interest charges will still accrue for certain transactions, such as balance transfers and cash advances.
  
  
• Use a 0% intro APR credit card.
  
  
• Avoid cash advances.
  
  
• Avoid balance transfers. You could opt to use a card with no balance transfer fees, however you may still accrue interest on the balance transfer balance.
  
  
• Use a no foreign transaction fee credit card when making international purchases.
  
  
• Use a no annual fee credit card.