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What are the Different Types of Finance Charges?
There are a number of different types of finance charges that can be charged on credit accounts; these charges are considered to be the "cost" of borrowing funds or of having access to credit. Some of the most common finance charges are interest charged on a loan, or transaction fees associated with making a charge or a payment. Late fees are also a type of finance charge, and yearly fees for holding a credit card are technically another type, even though they typically do not vary the way interest charges do.
When opening any type of credit account or borrowing money, it is very important to research and understand all the possible finance charges, since these can be very costly over time. It is important to learn the interest rate, which is also referred to as the annual percentage rate, and abbreviated APR; determine whether it is fixed or variable. It is also necessary to understand how the interest is compounded; whether it is based on a monthly balance or the average daily balance, for example, or if it is simple interest that is determined up front based on the amount of the loan. All of these different types can have a significant impact on the amount of finance charges paid over the life of the loan or credit account.
Other finance charges can often be avoided, such as late fees. These fees occur when payments are made late, or for less than the amount that is owed. Making sure to always pay bills on time, even if it is only possible to make the minimum payment, is the best way to avoid late fees. Some companies may also charge transaction fees if a purchase is made on a line of credit, though this will be specified in the contract when it is set up.
Some credit cards charge yearly fees for holding the card, whether the account holder uses it or not. In general, unless the credit card has a fantastic rewards program that cannot be matched by a free card, it is best to avoid cards with yearly fees. There are plenty of credit cards out there that offer rewards, and which are free to use, with the exception of interest of course. It is best to go through all of one's accounts regularly and determine the amount of finance charges paid over the year; sometimes, it is possible to find alternatives that can help to save a lot of money.
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![Interest charged on purchases or cash advances is one form of a credit card finance charge.]()
By: bradcalkinsInterest charged on purchases or cash advances is one form of a credit card finance charge. -
![Making sure to always pay bills on time is the best way to avoid finance charges.]()
By: WavebreakMediaMicroMaking sure to always pay bills on time is the best way to avoid finance charges. -
![Car loans typically include either a one-time or monthly finance charge.]()
By: DeklofenakCar loans typically include either a one-time or monthly finance charge.
Discussion Comments
I agree with the article, one of the best ways to avoid paying a finance charge secondary to being late with payments is to pay bills on time. And I think the best way to pay your credit card bill on time is to set up automatic payments!
You can do this through your bank's website, they usually not only have your accounts information and transaction information but a bill pay tab that sets up online payments for your bills.
However, this way is difficult to make automatic payments because you do not know how much you bill is going to be for, so it would be best to set it up via your credit card's online account.
Here you can set up an automatic payment schedule that states based on what you choose, either to always pay the full amount or the minimum amount due.
I love this feature about credit cards; the feature I do not love - their finance charges on cash withdrawal - I think they are sneaky and ridiculous!
If you don't look at the fine lines on your twenty page credit card rules and agreement acknowledgement they send you, one would most likely assume that cash withdrawal would come with the same APR as your regular purchases - not so!
The ones I have seen are usually double the APR of regular credit card purchases! Has anyone else seen this on their credit card statements?
When my son was looking at buying his first car after college, he really did a lot of shopping around.
He used an online auto loan calculator before he even went to see a loan officer. This gave him a good idea of what his monthly payments would be.
It was easy to change the amount of money he would be able to put down and play with the interest rate.
This helped give him a good idea of what his monthly payments would be and how much he would be saving if he was able to make extra payments.
I often find myself using online loan calculators when I am looking at buying something that I will make long term payments on.
I have used these calculators to figure out mortgage loan payments and auto payments. It is nice to have the flexibility to plug in numbers and find out how much money you can save by making extra principal payments.
I hate to pay any more in interest or finance charges than I have to and like using these calculators to have a better idea of where the money is going.
Sometimes it can be discouraging to see how much money is going to pay your interest at the beginning of the loan. I guess that is the cost of borrowing money and the only other way around it is to pay cash for everything.
I have a credit card that doesn't have an annual fee, and one that does charge an annual fee. The reason I keep this one is for the airline miles that I accumulate.
Every year they send one free airline companion ticket, so I figure that is worth the annual fee I pay to have the card.
No matter what card I use, I try to pay off the balance every month so I don't have any extra finance charges.
When I use a payment calculator to figure out how much I would pay for these items if I just made the minimum payment, I am very motivated to pay off my balance every month.
@Subway11 - Banks charge a lot of fees for loans too. There are some loans that if you pay it back too quickly you will be charged prepaid finance charges.
This mainly pertains to mortgages and home equity lines of credit. My bank charges $850 if you pay off your home equity line of credit within two years of opening it.
They say that they do this because they waive the fee of $850 when you first open a home equity line, but you have to leave it open with a balance for at least the first two years so that you won’t be charged this fee.
If you look at most mortgages it is amazing to see how much the bank will earn in interest on a thirty year mortgage. This is why my husband and I paid off our home because we didn’t want to end up paying double for the home after the thirty years was up. You really need to look at a financial calculator to really see what you are actually paying. It will really surprise you.
I think that the finance charge on credit cards has gotten really high. I have seen credit card offers that require an annual fee of $250. That is crazy to me. I usually pay off my credit card bills at the end of the month, so I usually don’t pay the finance charge on any of these credit cards.
I won’t consider a credit card with an annual fee. There are also credit cards that never had an annual fee that are now charging an annual fee. For me it is not worth it because I am not going to pay a fee to have a credit card.
I also don’t pay finance charges because I pay the bills immediately. I use credit cards to rack up the reward points. This is really the only reason why I use the credit cards. If they didn’t have these reward incentives, I would pay cash for everything.
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