Finance Charge
Candlefocus EditorCredit card interest is the most common type of finance charge. Credit card companies charge an annual percentage rate (APR) for the credit line extended to cardholders. The APR for credit cards is typically higher than rates on other types of loans, such as mortgages or car loans. Credit card finance charges are compounded daily and can add up quickly if the cardholder doesn’t make payments on time.
Other types of finance charges may include late fees, over-limit fees, and account closing fees. Late fees are charged when cardholders fail to make the minimum payment on time. Over-limit fees are charged when cardholders exceed their credit limit. Account closing fees are charged to cardholders who close their account before their balance is paid off.
Penalty fees for violating the agreed terms of a loan or credit line can also be considered a finance charge. These fees may be assessed if the cardholder misses payments or invests in hazardous products, such as penny stocks, foreign currency, or energy options.
The Truth in Lending Act of 1968 requires that lenders provide borrowers with all applicable interest rates, fees, and finance charges when they take out a loan or open a line of credit. This helps consumers understand the total cost of borrowing money and protects them from unfair and deceptive lending practices.
Finance charges can be costly and should be avoided when possible. Consumers should always read the terms and conditions of their loans or credit lines carefully and pay their bills on time to avoid late payments or finance charges. Understanding finance charges and how they work can help consumers make informed decisions about borrowing money and using credit.