What is a Finance Charge on a Credit Card?

3 Min Read | Updated: August 15, 2023

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This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.

The definition of a finance charge is an interest charge or other fees associated with using a credit card. Learn more about credit card finance charges and how to avoid some of them.

At-A-Glance

Finance charges are defined as a charge associated with using credit.
One reason that credit card issuers use finance charges to help make up for non-payment risks.
You can minimize finance charges by paying off your credit card balance in full each month.

Imagine lending a significant amount of money to a stranger. You’d probably want some kind of extra compensation or collateral to justify the risk, right? Now, imagine you’re a credit card company extending credit to millions and millions of people, despite the chance that some card members will fail to make their payments.

Enter the “finance charge.”

Most credit cards come with finance charges, largely to compensate the lender for the risk of non-payment. But what exactly do finance charges include, how are they calculated, and can they be avoided?

What is a Credit Card Finance Charge?

The definition of a finance charge is interest charges or other costs associated with using credit. For credit cards, these charges typically include interest, but may also include other fees, charges, and penalties associated with using the card.¹

When your card issuer sends you your monthly statement, it lists any finance charges along with your purchases and payments. How your finance charge shows up on your statement will depend on your card issuer. For example, it might be listed in a separate finance charge category, or the statement might just list all the components that make up a finance charge right in with your purchases and other activity.

What’s Included In a Credit Card Finance Charge?

Finance charges include any fees paid to the lender, such as:²

Interest
Annual fees
Foreign transaction fees
Cash advance fees
Late payment fees
Balance transfer fees

The most common type of finance charge is interest. Other credit card finance charges include annual fees or late fees. Fees or interest charges for cash advances, balance transfers, or foreign transaction fees could be considered credit card finance charges too.

Finance Charges for Loans & Mortgages

While the term “finance charge” is typically used in the context of credit cards, other forms of credit—personal and auto loans, or mortgages—may have finance charges, too. With any kind of credit, finance charges help lenders cover the nonpayment risk of extending credit and give them a way to make a profit on the use of their money.³

With loans and mortgages, finance charges can include a one-time loan origination fee as well as interest payments.

How are Finance Charges Calculated?

Since your finance charge depends on multiple factors, including the account balance and your card’s interest rate, it will typically vary from month to month. Each charge is calculated separately, based on the rules in your card member agreement.

By way of example, say you didn’t pay off your credit card balance in full by the end of the grace period. You also withdrew a cash advance and made a few foreign purchases this month. Depending on your credit card’s terms, your finance charge might include:

Interest. Including interest accrued from carrying a balance
A cash advance fee or charge, as well as interest charges on the cash you withdrew
Foreign transaction fees

Can Finance Charges Impact Your Credit Score?

While finance charges themselves are unlikely to impact your credit score, they could have an indirect impact on it. Paying finance charges on time could help to bring down your credit card balance, something that could have a positive impact on your credit score.⁴

How to Minimize Credit Card Finance Charges

It can be tough to avoid finance charges altogether, but there are ways to minimize them:^5,6

Pay off your balance in full each month before your grace period ends to avoid interest charges on the purchase balance. Keep in mind, however, that interest charges will still accrue for certain transactions, such as balance transfers and cash advances.
Use a 0% intro APR credit card.
Avoid cash advances.
Avoid balance transfers. You could opt to use a card with no balance transfer fees, however you may still accrue interest on the balance transfer balance.
Use a no foreign transaction fee credit card when making international purchases.
Use a no annual fee credit card.

Blue Cash Preferred Offer Earn $250 Back After spending $3,000 in purchases on your card in your first 6 months. Terms Apply.

Frequently Asked Questions

Finances charges include interest. A finance charge can refer to a combination of interest, fees, and penalties that a lender charges you for borrowing money, including interest and annual fees. Other common credit card finance charges include fees or charges for late payments, balance transfers, foreign exchange fees on international transactions, or cash advances.

Repaying your entire credit card balance on time each month could help you avoid late fees and interest on the balance, two common finance charges. Similarly, if your credit card offers a 0% APR introductory period, you could avoid interest on most charges during this period by paying the minimum payment each month and paying off your balance before the introductory period ends. Note that in many cases interest charges and fees on certain transactions such as balance transfers and cash advances will still apply. You could also avoid certain transactions that come with additional charges if the benefits aren’t worth the fees.

Lenders issue finance charges to help offset their risk of losing income due should a cardholder default on payment. You may also receive finance charges if you carry a balance on your credit card, pay your bill late, or make certain types of transactions like balance transfers, cash advances, or foreign transactions. Some credit cards also charge an annual fee.

The Takeaway

Extending credit to millions of people is a risky business, so credit card and loan issuers use finance charges to generate revenue and make up for the risk of non-payment. Your credit card finance charges may vary, so be sure to check your statement every month.

^1,2 "What Is a Finance Charge?," Experian

³ “What Is a Finance Charge? Definition, Regulation, and Example,” Investopedia

⁴ “How Finance Charges and Minimum Payments Affect Your Credit Score,” Experian

⁵ “Finance Charge Definition,” The Balance

⁶ “What Is a Credit Card Finance Charge and How Can I Avoid Paying It?,” The Ascent

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Megan Doyle is a business technology writer and researcher whose work focuses on financial services and cross-cultural diversity and inclusion.

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.

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