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What is a Finance Charge?

Michael Pollick
Updated May 16, 2024
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It's easy to forget that banks and other lending institutions actually need to earn money themselves. One way credit card companies and banks make a profit is by charging customers for the privilege of borrowing their money. Any additional fee added to the original amount of a loan can be called a finance charge. This definition of finance charge includes the interest added to the balance, service fees for transactions, late fees, and balance transfer fees.

When a customer receives a $1000 USD loan from a bank, for example, the bank has the legal right to charge interest based on the current federal prime lending rate. If this interest rate were a fixed 10%, the eventual 'cost' of borrowing the original $1000 would be at least $1100, the amount of the loan plus a $100 finance charge. But this isn't the end of the story.

Banks and credit card companies also expect a minimal payment to be made by a specified time of the month. Customers may have a few days after that date (called a grace period) to send off their bill, but payments received late can be assessed late fees or another finance charge. The terms of these penalty fees must be spelled out in writing under a federal Truth-in-Lending Act. If a customer can pay off the entire balance due before the grace period ends, no finance charge should be incurred. But most credit card holders have substantial balances remaining on their accounts, which means the bank or credit card company can legally add a percentage of that balance to the total amount owed.

Some may feel that banks and other lending institutions exploit the system by creating an impossibly strict finance charge policy. The truth is that all banks and other lenders must periodically report their practices to a federal board which oversees fair lending practices. As long as a bank or lender reports all the potential forms of a finance charge in writing and the borrower agrees to those terms, there is little legal recourse. This is why bank loan officers encourage borrowers to read the terms of the loan contract carefully before signing.

A standard finance charge such as interest payments or late fee should be anticipated as the cost of borrowing money. Consumers looking for the best loan arrangements should compare different rates offered at various banks and credit unions to get the best terms possible.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Michael Pollick
By Michael Pollick
As a frequent contributor to SmartCapitalMind, Michael Pollick uses his passion for research and writing to cover a wide range of topics. His curiosity drives him to study subjects in-depth, resulting in informative and engaging articles. Prior to becoming a professional writer, Michael honed his skills as an English tutor, poet, voice-over artist, and DJ.
Discussion Comments
By anon247574 — On Feb 14, 2012

Is it legal for a loan company to charge 80 percent interest on a loan? The loan was $1250 and the finance charge was $610, which came to a total of $1860 to pay back.

By anon162182 — On Mar 22, 2011

My mother financed a hot tub through aquavantage financing approximately 13 years ago for a total of $7,000. I myself submitted the payment monthly for about five years until my mother took over her finances after I relocated. She made regular on time payments for another six years when my sister took over her finances.

My mother recently found that the payments were not being made on her account and the interest and late payments have returned the balance back to the original loan amount. My question is can interest and late payment exceed the original loan amount because technically if she pays the remaining balance she has paid $14,000 on a $7,000 loan. What can she do?

By anon92653 — On Jun 29, 2010

I have found that if you are generally good about paying off your credit card balance, but you miss a payment by a few days, some credit card companies will waive the fees. Although I am pretty religious about paying off the balance, but this has happened to me a few times over the years. In each instance I called up and explained the reason - and they waived the fees!

By anon79644 — On Apr 23, 2010

Chase charged me a late fee for not paying my full balance by the due date (I was two days late). I asked for the fee to be waived and they said no. They are now charging me a late fee every month for not paying the original late fee.

I closed the account when they wouldn't waive the late fee and they are now charging me every month another late fee, this seems unfair.

If I never pay the fees will keeping accumulating until I will owe hundreds, then they will send me a cancellation of debt years down the road and I'll have to pay taxes on it.

My debt should only be the first late fee, not additional ever month. The original balance was less than the late fees and was only late by two days!

By anon76950 — On Apr 12, 2010

I recently paid off my credit card. And I had a credit on my account. Now this statement they are charging me interest on the cash advance that is still sitting there. Can they still charge me interest on that and if they can for how long? I can't believe this I paid this balance off. Please help me. thank you Lost

By anon74920 — On Apr 04, 2010

Purchase interest charges are being placed on an account not being used. The balance exists and less than minimum payment is being made monthly. how to stop these charges?

By anon66265 — On Feb 18, 2010

I have an automated deduction of $45 that they take from my back acct. as a "echeck". This happens on the 25th of every month. Generally, though, the bill is due on the 11th, but I avoid that. If I set up my deduction to come out of my account before the 11th, could I avoid a finance charge?

Do I only get finance charges if I use the card, or do I get them just by having a balance left? I'm so confused.

By anon56045 — On Dec 11, 2009

Why is my finance charge showing as a purchase on my credit card bill? This is a credit card I stopped using because of high interest rates. Does this mean they are adding the finance charge as a purchase to accrue more finance charges?

By anon55183 — On Dec 05, 2009

My credit card is a closed account so I can't use my credit card anymore; I just need to pay off my balance. If all I have is a balance to pay off on a closed account and am not and cannot use the card, why are they still charging me finance charges?

By anon49605 — On Oct 21, 2009

I paid my balance off last month. this month's bill showed a existing balance even though I paid the full balance due. the balance is said to be finance charges for last month. why were they not added to last months bill in the first place to be paid? Am I paying interest this month on last month's finance charges? I am so confused. I just paid the balance today. will I get another finance charge?

By anon46472 — On Sep 25, 2009

To Kimlarae, I'm not sure if you've used your card *ever* before, but this could be due to residual retail finance charges that were assessed in between your sending of payment and posting of payment. Also, where purchases and balance transfers accrue FC monthly, cash advances accrue FC's daily! so for each day that cash advance sits on your account unpaid, it is accruing FCs. The reason behind this is because this is money that the bank owns and is going unaccounted for in terms of use. The bank sees this as a higher risk and therefore charges a higher APR and stricter FCs to it. To anon 31335, not typically. Pay attention to your statement due date, of course, and you shouldn't accrue any more than what the statement says as long as you are a pay in full customer. However, if you go beyond your due date you will instantly start accruing the FC's on each SPC that contains an outstanding balance. (SPC stands for Standard Pricing Category. SPC1 is Balance Transfers, SPC2 is Cash Advances, and SPC3 is Purchases. SPC4+ can be classified as promotional rates and offers.) anon 23473, as stated above, it is a very good idea to pay close attention to your due date and either your balance or your minimum due. One more note, ladies and gentlemen, please remember that paying only your minimum due does not prevent finance charges from adding up, it just keeps you from accruing late fees. If you truly wish to avoid finance charges entirely, it is recommended that you pay off the entire outstanding balance.

By anon31335 — On May 03, 2009

If I pay my bill off every month (the whole thing) do I still get charged a finance charge?

By anon23473 — On Dec 25, 2008

IF Bank gives the outstanding due date for a certain amount of money in the credit card than do we have to pay the amount before the outstanding due date?

By kimlarae — On Jul 23, 2008

Why is there a finance charge for "purchases" and "advances" when I haven't used my card at all. Every month there is several dollars for purchases and four or five dollars under "advances".

By math — On May 01, 2008

Hi anon12108 and elsewhen - Thanks so much for responding to my question(s). You have explained the matter and offered great advice in a manner which helps me to understand Finance Charge terminology deeper.

By anon12108 — On Apr 30, 2008

When you carry over any balance it is seen as the money that you have borrowed from your credit provider and they charge interest on that. When you pay minimum balance it will first take of all the pending finance charges and then deduct the additional amount from principal so in reality they are charging interest only on your principal balance but say you don't even make minimum payment and carryover the interest also (which will show your account as delinquent) they will start calculating interest on their interest also because now you owe them the total amount and it becomes new principal. Regarding the APR all your payments are applied to the balance with lowest APR first so that high APR balances (like 10.24% purchase APR in your case) is carried for a longer time and accrues more interest. Why you are being charges 5.092% is something you should call your credit card about.

By math — On Apr 11, 2008

Why do credit card people add the finance charge to the balance? Then compute the new balance to add another finance charge on the next statement? Doesn't this mean they are computing interest on their finance charges? Is this legal? They offered a 3.9% APR for the balance transfer and the statement shows the APR to be 5.092% and also shows a nominal APR of 10.24% on purchases. I make payments ahead of time and always pay more than the minimum. Please help me understand what is going on. Thanks

By elsewhen — On Feb 04, 2008

I have found that if you are generally good about paying off your credit card balance, but you miss a payment by a few days, some credit card companies will waive the fees. Although I am pretty religious about paying off the balance, this has happened to me a few times over the years. In each instance I called up and explained the reason - and they waived the fees!

If you ever miss a payment, you might as well call - it doesn't hurt to try! Of course, if you are many days late, they are probably not going to be as flexible.

Michael Pollick
Michael Pollick
As a frequent contributor to SmartCapitalMind, Michael Pollick uses his passion for research and writing to cover a wide...
Learn more
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