What are Finance Charges in Credit Card?

Lenders offer various financial tools, such as loans and credit cards, to meet your financial needs. However, finance charges are levied in case of default in repayment. Credit cards are versatile financial tools that allow you to purchase without cash, but finance charges can quickly increase your monthly credit card bills. 

In this blog, we will discuss what finance charges mean on credit cards, how they are calculated, and tips for reducing them.

What are Finance Charges?

A finance charge includes costs associated with borrowing money and paying it back over time, such as accrued interest and fees like transaction fees. For credit cards, it is the interest plus penalties, annual fees, and other charges for the billing cycle. Credit card issuers use the annual percentage rate (APR) to calculate interest on the average daily balance.

What are Finance Charges in Credit Cards and their Type?

Credit card finance charges are fees charged by the lender for using their credit card services. These fees are added to the outstanding balance and are calculated based on the card's APR. Charges vary by credit card, so review your card's terms to avoid high fees.

Below are the types of finance charges on credit cards:

• Interest Charges: Interest charges are common finance charges on credit cards. They apply to outstanding balances and vary based on the card's APR.
• Cash Advance Fees: Cash Advance Fees are charged when you withdraw cash using your Kotak credit card. Use this feature wisely, as fees can be higher than interest rates.
• Balance Transfer Fees: Balance transfer fees are charged as a percentage of the transferred balance when moving debt from one credit card to another.

How is Credit Card Finance Charge Calculated?

In order to understand how finance charges are calculated, it is important to know the different factors involved. The calculation generally takes into account your annual percentage rate (APR), the type of balance you have, your balance amount, and the duration for which it is carried.

The calculation primarily uses your APR, which is your yearly interest rate. This rate is divided by 365 (number of days in a year) to calculate the daily periodic rate (DPR). The DPR is then applied to the different types of balances (purchases, cash advances, or balance transfers) you might have on your card.

Most credit card companies determine finance charges by utilizing the average daily balance method. Under this method, the issuer calculates your balance every day for the billing cycle, adds these figures together, and then divides the total by the number of days in the cycle. The resulting figure is multiplied by the DPR and then again by the number of days in your billing cycle to determine your finance charge for the period.

Let's take an example to understand how to calculate finance charges on a credit card. Suppose you have an outstanding balance of Rs. 100,000 on your credit card with an APR of 20%. The DPR would be 0.0548% (20% divided by 365). If you carry this balance for a 30-day billing cycle, your finance charge would be approximately Rs. 1,644 (Rs.100,000 x 0.000548 x 30).

Also Read - Do's and Don'ts of Using a Credit Card

How can you Avoid or Reduce your Credit Card Finance Charges?

To manage your credit card expenses, keep these tips in mind:

• Always pay your dues on time to avoid late payment fees and finance charges.
• Pay more than the minimum due or clear your dues entirely each month.
• Consider credit cards with a lower annual percentage rate (APR).
• Take advantage of the interest-free period offered by your credit card.
• Avoid cash advances or withdrawals using your credit card.
• Convert large purchases to EMIs for smaller installments over a longer period at lower interest rates.

Also Read - Know the Benefits of Using Personal Loan to Pay Credit Card Debt

Conclusion

High finance charges on your credit card can accumulate rapidly, causing significant debt and financial strain. It is essential to comprehend how finance charges are calculated and their influencing factors. By following the suggestions discussed in this blog, you can avoid or decrease excessive finance charges on your credit card. Therefore, monitoring your credit card usage regularly and making informed decisions to manage your finances efficiently is crucial.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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