Finance Charge
Finance Charge refers to the total cost of borrowing money on a credit card or loan, including interest and certain fees that are required as part of the credit agreement. This is evaluated within APR, Interest & Fees.
Plain-Language Meaning
A finance charge is the amount a lender charges for letting you borrow money, typically made up of interest and specific fees that are part of the loan or credit card terms.
Practical Example
If you carry a balance on your credit card from one month to the next, you may see a finance charge on your statement, which represents the interest and any applicable fees for using the borrowed funds.
What It Does Not Mean
Finance charge does not refer to the total amount you owe on your credit card or loan, nor does it include optional fees or penalties that are not directly tied to the cost of borrowing.
How the System Uses It
The system uses the finance charge to calculate the true cost of borrowing, helping to determine the annual percentage rate (APR) and the total amount paid over time for using credit.
Common Misconceptions
- “Finance charge is just another word for interest.” While interest is a major part, finance charges can also include required fees related to the credit.
- “Finance charges only apply if you miss a payment.” Finance charges can apply whenever a balance is carried, not just for missed payments.
- “All fees on a credit card statement are finance charges.” Only fees directly related to borrowing, such as required minimum charges, are included in the finance charge.
Related Pages
Related Glossary Terms
FAQ
- Does the finance charge change every month? The finance charge can change each month depending on your balance, interest rate, and any applicable fees.
- Is the finance charge the same as the minimum payment? No, the finance charge is the cost of borrowing, while the minimum payment is the smallest amount you must pay to keep your account in good standing.