What are Credit Card Finance Charges?

For the sake of simplicity, a “credit card finance charge” is interest owed for borrowing money.

If you fail to pay off your credit card balance in full each month, you’ll be subject to finance charges (assuming the APR is greater than zero).

The amount of finance charges will depend on both the accounting method and the APR tied to the credit card.

The higher the APR and/or balance, the higher the finance charges.

Most credit card issuers use average daily balance to calculate your finance charges.

Let’s look at an example:

Credit card balance: $5,000
Credit card APR: 19.99%
Accounting method: Average daily balance
Monthly finance charges: $66

Though your credit card balance is currently $5,000, let’s assume the average balance during the billing cycle (30 days) was only $4,000.

First we figure out your daily periodic rate (DPR) by dividing your 19.99% APR by 365. We come up with 0.000548.

Then we multiply the DPR by the $4,000 average balance by the number of days in the billing cycle (30).

0.000548 x 4000 x 30 = $65.72

We come up with roughly $66, which would be your finance charges, or interest owed, for the month.

There are other accounting methods for calculating credit card finance charges, but they all pretty much result in the same amount of interest owed.

And I don’t want to over complicate this subject, so I’m keeping it simple.

Assuming you were paying $66 a month in finance charges, you’d be paying roughly $800 annually (using simple math).

To avoid all those finance charges, you could execute a 12-month 0% APR balance transfer and pay no finance charges for a year.

You’d save $800 over the first year and probably pay down your credit card balance in the process.

Some balance transfer drawbacks include potential credit score dings and balance transfer fees, which vary among card issuers.

But the value of credit card balance transfers is pretty obvious, especially if you’re currently carrying high APR balances.