Most credit cards give you the option of paying off your charges each month or taking your time and making monthly payment. If you choose to take your time paying off your balance, you’ll be hit with a finance charges. Finance charges are essentially the fee you pay for carrying your balance beyond the allowed grace period. It’s an interest charged in exchange for the convenience of paying your balance over time rather than all at once.
Credit card finances charges are calculated based on your credit card balance and your interest rate. The higher both these numbers, the higher your finance charge will be each month. You’ll see the charge listed separately on your credit card statement each month. If you have more than one type of balance – like a purchases balance and a cash advance balance – you’ll see more than one finance charge listed.
How to Avoid Finance Charges
If you’re not currently enjoying a promotional rate on your credit card, you can avoid finance charges by paying your credit card balance in full each month. In the case of cash advances, you’ll have to pay off the advance right away since these transactions don’t have a grace period on most credit cards.
Why You Shouldn’t Pay a Finance Charge – Ever
Paying finance charges increases the cost of using your credit card. The smaller your monthly payments, longer it takes you to pay off your balance. You’ll end up paying more you’ll pay in finance charges. Even if you can’t afford to pay your full balance in a single month, you can reduce your overall finance charge by paying as much as you can each month until your balance is completely repaid.
On a rewards credit card, finance charges can devalue the rewards you’ve earned. For example, if you earn $4.50 in rewards in a particular month but you have a $5.20 finance charge. In this scenario, you’ve offset the rewards benefit with an interest payment. In a sense, paying interest on your credit card means you’re paying for your own credit card rewards. You’d fare better by paying in cash. You wouldn’t earn any rewards, but you also won’t pay any interest.
Avoiding finance charges also lowers your debt expense. Each month’s finance charge may seem low, but over a period of time you could pay hundreds, even thousands of dollars in interest. Had you invested the money rather than paid it to your credit card issuer, you may have earned a return on your investment.
Paying a finance charge on a credit card could be a sign that you’ve taken on too much debt. Your credit card debt could get worse if you continue making new charges or if you lose your job. If you stick to spending only what you can afford to pay in a particular month, you’ll avoid both finance charges and debt.
