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finance charge

You may have noticed a pesky charge on your credit card bill labeled “finance charge.” Ever wondered what the charge was? The finance charge is essentially how you pay for leaving a balance on your account. When you don’t eliminate the balance, it earns interest which you also have to pay. Now you’re probably wondering how to avoid credit card finance charges.

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What Is a Finance Charge?

The finance charge is the charge you see when you fail to pay your credit card bill before the due date. When you leave a balance on your credit card, that amount accrues interest. The interest rate it grows at depends on the card’s APR. So when your balance accrues interest, you pay that interest in the form of a finance charge.

Some definitions of a finance charge include other account fees with the finance charge. These fees include maintenance fees, balance transfer fees, late fees and more. Either way, from the card issuer’s perspective, the finance charge is how it makes some money for lending to you.

The exact amount of your finance charge will depend on your balance and APR. Further, credit card companies differ in which balance they use. Some may use your average daily balance, while others use the balance at the beginning or the end of a cycle. Don’t forget to read your credit card agreements to find out exactly how your issuer determines your finance charge.

You can find the finance charge on your credit card statement. It may be labeled as an “interest charge.” It’s important to note here that you may see more than one finance charge, one each for purchases, cash advances and balance transfers. If you haven’t made any cash advances or balance transfers, then there’s no need to worry. But don’t forget that cash advances and balance transfers are treated differently than purchases. Cash advances and balance transfers begin accruing interest almost immediately. Purchases won’t accrue interest unless you fail to repay the full amount by the due date.

How to Avoid a Credit Card Finance Charge

finance charge

Simply put, all you have to do is pay your credit card bill in full and on time. If you’ve already made a habit of doing this – great job! You may not have even seen a finance charge to your account.

Paying each bill on time has a ton of benefits. For one, you get to avoid late fees and a penalty APR. On time payments also help your credit and show potential lenders that you have responsible credit habits. Some credit card issuers may even offer rewards for consistently paying on time.

Paying your credit card bill in full also has its benefits, mostly in saving you money. Paying your bill in full means you aren’t left with an account balance. A $0 balance won’t earn interest, so you get to avoid the finance charge.

To stay on top of your credit card charges, always be aware of your due date and whether or not you have a grace period. A grace period is the time between your statement is mailed out and your due date. Often this grace period lasts about 25 days. As long as you pay your bill during this time, you can successfully avoid a finance charge.

Alternative Ways to Avoid Credit Card Finance Charges

Again, the best way to avoid credit card finance charges is to pay your bill on time and in full. But that’s not always feasible for all credit cardholders. In that case, you can try to transfer your existing balance to another credit card. Ideally, you’ll transfer your balance to a 0% APR credit card. Even if it’s not 0%, a lower APR can still help you out.

Transferring your balance to a lower APR card means you can pay off the balance at a lower rate. The interest won’t pile on as heavily, leaving you less burdened than your original credit card.

This alternative does come with some drawbacks and risks, though. For one, you can face some fees for making balance transfers. You’ll have to weigh whether the fees are worth the transaction. Then, you will have to know exactly when the 0% APR period ends. Often these promotional periods end after a year or so. To truly save yourself from debt and overpaying, you’ll need to pay off your balances before the promotional period is up.

How to Lessen Your Finance Charge

finance charge

If you can’t seem to avoid the finance charge altogether, you can work on lessening it. Instead of paying your bill in full, pay it off at least partially. This avoids any late fees and penalties. Paying the partial amount will also still decrease your balance. Decreasing your balance means that your interest charge will also be decreased.

It’s easy to revert to simply paying the minimum amount stated on your bill. However, if you can, you should pay more than the minimum. That lessens your burden for the future more than the minimum will.

It’s important, though, that you pay off your balance in full as soon as you can. Otherwise, you’ll continue to rack up interest charges. Then, you’ll owe way more than you initially spent. That’s how folks tend to end up in tons of credit card debt.

Keep in mind that transactions like cash advances and balance transfers begin accruing interest immediately. In those situations, you can’t quite avoid the finance charge. The only way to lessen it is to make smaller transactions.

Final Word

When it comes to credit cards, we can’t stress enough how important it is to pay your bills in full and on time. Doing so isn’t only the responsible thing to do, but it comes with a ton of financial benefits. Plus, you get to avoid paying way more than necessary due to high interest rates and finance charges. Simply use your card and your credit responsibly and you’ll have no problem avoiding credit card finance charges.

Tips on Best Credit Card Practices

  • Getting a credit card is a huge responsibility. You’ll want to use it as responsibly as you can. That way, you can avoid paying unnecessary charges in fees or penalties. Plus, spending and repaying only what you can afford will ensure you don’t dig yourself into a hole of credit card debt.
  • When looking for a credit card, it’s important to find the best one for you and your financial situation. If you want cash back rewards and you often spend money at restaurants, find a card that rewards you extra for restaurant purchases. Try comparing credit cards to each other before committing.

Photo credit: © Guillem, ©, ©

Lauren Perez, CEPF® Lauren Perez writes on a variety of personal finance topics for SmartAsset, with a special expertise in savings, banking and credit cards. She is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society for Advancing Business Editing and Writing. Lauren has a degree in English from the University of Rochester where she focused on Language, Media and Communications. She is originally from Los Angeles. While prone to the occasional shopping spree, Lauren has been aware of the importance of money management and savings since she was young. Lauren loves being able to make credit card and retirement account recommendations to friends and family based on the hours of research she completes at SmartAsset.
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