What is Finance Charge on a Credit Card Balance?
They calculate the finance charge on a credit card balance of $3,299.19 at a monthly rate of 1.2%. is the percentage of the balance that is charged as interest each month. For example, if you have a $1000 balance and finance charge at 16% then the following month you will be charged $16 in interest fees in addition to paying off $100 of the principal amount to reduce your balance.
How does finance charge work for credit cards?
Finance charges are calculated on a monthly basis, rather than on an annual basis like mortgages are. This means that every time you make a purchase with your credit card, any money left over from that purchase goes towards your principal balance rather than going towards reducing your next payment like it would with a mortgage.
Can I avoid finance charges?
Yes, there are some ways that you can avoid finance charges.
1) If you pay your credit card balance in full every month, then no interest will be charged to you.
2) If you have an introductory offer on your credit card, then there is a very good chance that the initial interest rate of the card will be 0%. Your first payment is simply made up from any money left over from this purchase and put towards the principal amount.
3) If you pay with a debit or cash card, then no interest will be charged to you.
4) If you carry a balance, then you will pay interest on that balance.
5) If you pay off your credit card in full each month and do NOT carry a balance, then no finance charges will be charged to you.
6) You can get pre-approved for 0% financing rates
Why are finance charges important?
1) They are an expense that is automatic since the interest you are charged is set by law.
2) They prevent people from paying the minimum payment so they can make more money by carrying a balance to lower their payments over time.
3) They are a hidden cost that will increase the overall cost of your credit card.
4) They act as a cap on your spending, so that you can’t spend more than what you have. If a person had unlimited spending and never made interest payments then they could spend all the money they had earned in interest.
5) They become an ordinary and regular part of life for people who carry a balance. When we make purchases with our credit cards we pay the finance charge representing the interest. So every time we make a purchase with our credit/debit/prepaid card, we are also making an interest payment which is simply another expense for us to deal with. This is like making payments for your utilities, cable TV or even your internet service provider. Every time you pay for a service, you are also paying off that interest as well.
6) They act as a hidden tax on the average person whose salary and income are not that great. This means that they cannot afford to carry a large balance and thus must pay all minimum payments and thus carrying a balance in spite of the interest you need to pay in order to make all of your minimum payments, which means you are effectively paying an extra tax every month that goes towards covering your interest charges, which most people do not pay if they have the option of paying all minimum payments each month.
Advantages:
There are many advantages to carrying a credit card account balance instead of paying it off in full each month:
1) You get free air flights on American Airlines.
2) You get free loans from many financial institutions and lenders.
3) You do not need a minimum income to qualify for most credit cards.
4) If you carry your balance from month to month you will never pay any interest and thus will never have any other payments to make other than the principal amount of your purchases.
5) There is no risk of overspending by carrying a balance because if you use the money that is left over after making purchases on your credit card account then you won’t make any interest payments on that cash.
Disadvantages:
There are very few disadvantages to carrying a credit card balance:
1) You will have to pay your credit card balance in full each month if you want to avoid paying financing charges.
2) If you plan on making any purchases with your credit card then you will have to make sure you have enough money in your account so that if the purchase is more than what is left over from the purchase then you do not end up paying a finance charge on the extra amount.
3) If you don’t pay off your credit card account in full each month, then finance charges will start costing you money.
