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Finance charges are the total cost of interest and other charges you must pay to carry a balance on your credit card. In other words, the charges for using credit – borrowing today to pay back at a future date. If you have a grace period on your credit card, the money you borrow is “free” until the due date for paying it back. If you do not pay it all back in full before that time is up, you will owe finance charges on the balance.

Finance charges must be listed on your monthly statements as the total dollar amount you must pay for the use of the card. Remember, you can avoid finance charges altogether by paying your balance in full every month.

EXAMPLE:
Finance charges can be calculated this way:
Average daily balance x daily periodic rate x number of days in billing cycle

Let’s say your average daily balance (each day’s balance / total number of days in a month) is $200. Your Annual Percentage Rate (APR) is 18%, making your daily periodic rate (the APR / number of days in a year, or 365) is then 0.049%. The total number of days in your billing cycle is 30.

200 x 0.049% x 30 = $2.96 in finance charges for the month

See also:
How is my balance calculated every month?
What is an APR?
What is the difference between a variable APR and a fixed APR?
What is a minimum finance charge?

Last update: 2006-09-25 19:10
Author: BKO

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