What are finance charges on credit cards? Learn how to minimize them

With credit cards, you can avail exciting rewards and deals which can help you save on your expenses. You can enjoy cash backs and exclusive offers from travel to grocery shopping and much more that can elevate your experience. However, if you do not plan your credit card usage, you may end up in debt trap eventually.

Credit cards include finance charges which you are bound to pay as per bank’s policies and guidelines. Understanding these finance charges are extremely important in order to avoid any last minute surprises.

What are the finance charges in credit cards?

Finance fees are charged by banks to credit card users using credit cards. These are added to the outstanding balance and are calculated based on the annual percentage rate (APR) of the card. Finance charges can be calculated differently by the variant of the credit card and bank’s policies. Thus, we need to know the type of finance charges to prevent us from paying high fees.

Interest charges: This is interest charges applied to the outstanding balance if you fail to pay in full by the due date. The APR varies depending on the card variant.

Cash advance fee: This fee is charged each time you withdraw cash from your credit card at an ATM. These fees may be higher than the standard interest rates.

Balance transfer fees: This is the fee that you have to pay when you transfer your outstanding dues from one credit card to another. The fee is usually a percentage of the transferred amount.

Late payment fee: This fee is charged if you don’t pay your minimum amount during the due date. The amount of the fee depends on the bank and the delay duration.

How are finance charges calculated?

You must note that every bank uses different methods to calculate the finance charges against credit cards. However, there are two most common methods which are generally used by banks to calculate the finance charges.

Balance method: In this method, finance charges are based on the daily balance of your credit card. It sums up the total daily balances for the billing cycle and divides by the number of days in the cycle.

Average daily balance method: Through this method, the finance charges are calculated based on the average balance during the billing cycle. Each day's balance is added up and divided by the total number of days in the cycle to compute the final amount.

Tips to avoid high finance charges on credit card

Pay in full monthly: Clear your card balance in one go every month to avoid interest charges on purchases.

Utilise the grace period: Pay within the interest-free window between the statement date and due date to avoid extra charges.

Avoid cash advances: Until it is an emergency, you must avoid taking cash advances through your credit card as these come with high fees and interest charges start adding up immediately making them a heavy toll on your pocket.

Opt for lower APR credit cards: If you tend to carry a balance on your credit card, it is advisable to choose a card with a lower interest rate.

Watch out for introductory offers: Watch out for 0% APR promotions on purchases or balance transfers which can help you minimise finance charges.

Set up automatic payments: You can also enable automatic payments so that you can prevent missing your due dates and ultimately avoid finance charges.

Monitor your credit score: A healthy credit score (generally above 750) can help you qualify for better cards and lower interest rates.

In conclusion, you must note that even a single missed payment can damage your credit score and attract finance charges. Hence, it is important that you use your credit card wisely in order to avoid a heavy bill which you may not be able to repay on time. This way you can maintain a healthy credit profile and make the most out of your credit card.

(Note: Using a credit card carries its own set of risks)