Identification

• A finance charge is a fee that must be repaid along with an amount borrowed. This includes interest, late fees, annual fees and any other service fees.
  
  

Function

• Finance charges are the way credit card companies make a profit. By assessing interest fees, charges for services like balance transfers and the privilege of having a card, and penalties for exceeding the credit limit and making a late payment, credit card companies benefit from lending money to consumers.
  
  

Effects

• Credit card companies require that cardholders repay a certain percentage of the balance on their credit cards monthly. Finance charges are then added to this percentage, and the resulted amount is called a minimum payment. If a cardholder uses a service like a balance transfer, is late making a payment or goes over their credit limit, their monthly payment may dramatically increase from one month to the next.
  
  

Considerations and Warnings

• When applying for a credit card, it is important to understand the interest rate on the credit card as well as the cost of other fees that may be incorporated into the finance charge. Read over the account information carefully. Also be aware that repeated late payments or skipped payments can result in the raising of interest rates assessed. Such information is also contained in account disclosures.
  
  

Misconceptions

• Though it can seem like credit card companies have an unfair advantage over the consumer, there are many fair lending acts in place by the federal government that lenders must adhere to. Financial institutions can be fined heavily if they fail to disclose aspects of their finance charges or if they deliberately mislead consumers.
  
  

Solution

• The best way to avoid finance charges is to pay off monthly credit card balances in full whenever a bill is received. If full payment is received on time before the end of the grace period, the credit card company will waive the finance charge for that billing cycle.