What Are Credit Card Finance Charges?

It is important to note that interest or finance charges on credit cards are compounded daily. This means card issuers calculate finance charges on the daily outstanding balance. This is also one of the main reasons why a credit card overdue quickly escalates. Here is how finance charges are calculated:

Finance Charge = Outstanding Amount × Daily Interest Rate × Number of Days

Here, Daily Interest Rate = Monthly Interest Rate ÷ Number of Days in the Month

Let’s understand this with an example.

Suppose:

• Outstanding Amount: Rs. 30,000
• Monthly Interest Rate: 3.5%
• Payment Made: Rs. 10,000
• Remaining Balance: Rs. 20,000
• Days Outstanding: 30 days
• Monthly Finance Charge: Rs. 20,000 × 3.5% = Rs. 700

Therefore, the cardholder will have to pay an additional Rs. 700 as finance charges, apart from the outstanding balance.

Note: When you have any unpaid balance on your credit card, new transactions you make are not eligible for the interest-free period. This means, in addition to the outstanding dues, you will pay interest on every new purchase from the first day, again leading to quick escalation of your penalties.

You can check the finance charges on your credit card terms and condition documents or on the respective bank’s website. You may also find finance charges mentioned on your monthly credit card statement.

There are different names for finance charges so you should look for: finance charges, interest charges, interest on overdue balance or interest on revolving credit.

Credit cards do not charge any interest or finance charges as long as you clear your dues on time and in full. Here is what you can do to avoid paying finance charges:

• Pay the total amount due on or before the due date
• Do not pay only the minimum amount due
• Do not withdraw cash using your credit cards

If you find it difficult to keep track of multiple credit card bills, you can set up auto pay to clear your bills when they are due.