What is a Finance Charge?

Written by , January 7, 2013

What is a Finance ChargeAfter the market meltdown of late 2008 and early 2009, interest rates dropped to near historic lows. While these low rates are bad news for savers and anyone depending on interest income, low rates are beneficial to borrowers. But even when lending rates are low, it’s important to understand all applicable finance charges you may face, so that you can be confident you are getting the best deal and staying within your budget.

  • Finance Charge Basics. In general terms, a “finance charge” is the fee that you pay to a lender in order to borrow money or use a line of credit that they’ve extended to you. Finance charges are a normal part of any credit card account or store charge card, but also apply to home mortgages and car loans. Finance charges may include any fees related to the borrowing, including transaction-based fees, as well as fees for late payment.
  • Credit Card Finance Charges. Finance charges arising from credit card usage are likely to be the most familiar to many consumers. The basic finance charge on credit card accounts is almost always stated as a percentage interest rate based on the customer’s outstanding balance. Most credit cards also allow their customers to repay their new charges without incurring a finance charge provided that repayment happens within a grace period.
  • Regulation of Finance Charges. In order to protect borrowers from predatory lending practices, there are a number of different state and federal regulations relating to finance charges. Some of these regulations relate to the maximum finance charges that can be imposed on consumers, as well as what types of notice must be given to a customer of a revolving credit account (such as a credit card) before their finance charges can be raised going forward.

    There are also regulations that affect finance charges in other ways. For example, the fair credit billing act requires that any billing statement for a line of credit that has a grace period must be sent at least two weeks before the payment is due. This is to prevent the lender from avoiding their own grace period terms by not giving the borrower an adequate opportunity to service their debt.

  • What Do I Need to Know About Finance Charges? Finance charges may be viewed as a “necessary evil” of borrowing. The key to avoiding undue finance charges is to avoid finance charges altogether wherever possible. For example, while you probably won’t be able to purchase a new home without a loan, it’s generally unwise to incur finance charges for your day to day spending. In other words, don’t charge your groceries to your credit card unless you’re certain you’ll be able to pay off that amount in full when it’s due.
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