What is a Finance Charge?
What is a finance charge? This charge represents the cost of credit or borrowing, and may include interest, fees, and financial transaction costs. The federal definition is in Regulation Z, promulgated by the Federal Reserve Board. In personal finance, the term can refer to the dollar amount you pay to borrow money, or the percentage you pay in interest, referred to as annual percentage rate. As you can see, the federal definition is much more specific than the definition found in a dictionary.
Interest
In most cases, you will be asked to pay interest as part of the total cost of a loan. These fees can be either a percentage of the loan or a flat fee. They can also include loan application fees, loan origination fees, and account setup fees. The amount of finance charges you pay depends on the type of loan you are taking out and your credit worthiness. Interest rates vary greatly. Most loans have a minimum rate and interest rates can range from five to twenty-five percent.
Finance charges come in many forms, but most often they are an annual percentage rate. Some companies charge a flat fee for each transaction. Other companies may have transaction or account maintenance fees that add up quickly. It is best to pay off your loan early if possible to minimize your finance charges. There are other ways to reduce your finance charge. Here are some ideas:
Foreign transaction fee
A foreign transaction fee is a charge applied to an international credit card transaction. It varies in cost, from 1% to 3%. This finance charge is usually made up of two separate charges, one from the credit card issuer and the other from the third-party network that authorizes the purchase. While foreign transactions were traditionally only applicable to purchases made abroad, the term has expanded to include purchases made on foreign soil as well.
Foreign transaction fees are typically 3% of the value of the purchase. While this fee can be costly for some consumers, it is worth considering for your credit card usage when you travel abroad. There are credit cards that charge no foreign transaction fees, but you must check the terms carefully. If you find that a card has no foreign transaction fee, consider switching to a different credit card. There are plenty of cards available, so take your time to find one that suits your needs.
Cash advance
There are many costs associated with using your credit card for a cash advance, and the fees can add up to $50 or more to your bill. Cash advance fees vary, but they usually hover around $10 per transaction. For example, if you took out $250 in cash, you would be charged $260 in fees. Credit card companies, on the other hand, would prefer to see their money back, so high fees are a big problem.
In terms of total retail finance charge, MCC and BDO tied for first place. MCC was ranked first in over-the-counter credit charge and second in cash advance finance charge. These are the two most common types of finance charges that merchants can impose on customers. The average cash advance finance charge was just over 2%. Some companies even charge more for supplementary membership fees. Regardless of your specific needs, it is still worth it to choose a cash advance for emergencies.
Balance transfer
Choosing a balance transfer card can be a great way to get out of debt fast. The best credit cards offer a 0% introductory period, so the benefits of paying off your debt with a balance transfer card are many. You can also enjoy ongoing rewards and perks if you pay off your debt in full during the introductory period. Balance transfers are not for everyone, though. If you have a low credit score, you may not qualify for a balance transfer card.
A balance transfer finance charge is an extra fee imposed by the lender on the transferred amount. These transfers are generally offered by credit card companies, and the fees are usually two to three percent of the amount transferred. Some financial institutions charge a flat fee, up to $10, as a balance transfer fee. Usually, a balance transfer offer allows the borrower to save money by paying off the balance in a short period of time, and some cards even offer a teaser rate for a certain number of months.
Late fee
A late fee is a finance charge, or “late payment fee,” that is assessed to a customer when a bill is late. The fee compensates the creditor for the direct losses he or she incurs when extending credit to a late-paying customer. Creditors must calculate this charge, send a notice, and pursue payment in order to recover the fees. In addition to compensating the creditor for direct losses, late fees encourage customers to make their payments on time.
The interest rate that will be charged will depend on the amount owed each month. This amount will be determined by dividing the annual interest rate by twelve. In the example below, this amount is $120. The lender can then assess a late fee based on that monthly interest rate. The late fee is a finance charge that will increase your account balance and hurt your credit rating if you fail to meet your financial obligations on time.