Understanding Periodic Finance Charges on Credit Cards

a periodic finance charge is the amount of interest charged on the unpaid balance for purchases and cash advances, plus any fees or penalties that may be added to your balance. Most often, credit cards use this method to both reflect your costs as required by Truth in Lending, as well as for calculating the amount that you are charged.

Significance

When you are choosing a credit card, comparing its periodic finance charge with other cards is a good way to know how much you will be charged, because it includes other potential fees you may have to pay. It is unlike the annual percentage rate that will only give you the interest rate. This is very important because fees for being over-limit or making a late payment can be substantial, at times exceeding the amount of your interest charges.

Size

The average person in the U.S. has six credit cards. No doubt, many of them are paying hundreds of dollars more in credit card fees than they should. When you receive your next flurry of credit card offers, pay special attention to what it says about its periodic finance charge. Many offer low introductory rates, but they raise that rate after a certain period of time, or if you are even 1 day late with your payment.

Misconceptions

Many people believe that if they do not carry forward a balance on their credit card that they will not be charged interest on their current purchases, only to find that is not true when they receive their next statement. Those people should pay close attention to the information contained regarding their periodic finance charge, and the effect that has on what they will pay.

Time Frame

The periodic finance charge factors in the effect of the type of grace period that is being offered. Some give the grace period during which they waive interest on all purchases, regardless of whether you have carried forward a balance. Others will offer the grace period on new purchases, only if there was no balance remaining on your card from the previous month. Then there are those cards that offer no grace period at all. How a particular credit card company handles its grace period will greatly affect your cost of the card.

Prevention/Solution

The fees and penalties charged by credit card companies that are included in their periodic finance charge often exceed the amount of interest you will be charged. In some instances, credit card companies charge $35 or more if you go over your credit limit, or you are late with a payment. While more people struggle to avoid these charges, the credit card companies view those fees as a substantial source of income.