January 20, 2025

What Are Finance Charges, and How Can You Avoid Them?

When you borrow money — like through a credit card or loan — the main amount you borrow is rarely what you pay. There are other fees and costs to consider, also known as finance charges.

Finance charges are what allow lenders to turn a profit from the money they loan out. But these charges can look very different from lender to lender. And understanding them is an important part of keeping a good handle on your debt.

What is a finance charge?

A finance charge is the cost of borrowing money. Think of it this way: Lenders are essentially renting you money, and a finance charge is the rental fee. This "rent" allows lenders to make a profit and cover the risk of you not repaying the loan.

So is a finance charge the same as interest? Well, sort of — interest is one example of a finance charge, but it’s not the only type. Here are a few common fees you’ll encounter in different borrowing scenarios:

Credit cards. Beyond interest, credit card finance charges include things like annual fees, balance transfer fees, and late payment fees.
Loans. Finance charges on things like auto and personal loans usually include interest and origination fees (a one-time fee to process the loan).
Mortgages. Mortgage loan finance charges include interest, appraisal fees, and mortgage insurance.

How finance charges are applied varies depending on the type of loan and the lender. Credit cards typically calculate finance charges based on the outstanding balance at the end of each billing cycle. For loans, the charges are often preset and included in your monthly payments over the life of the loan.

Types of finance charges on credit cards

Paying off your credit card each month might prevent you from paying interest, but it won’t necessarily save you from other fees commonly associated with this type of lending. Here are some common credit card-related finance charges to watch for:

Interest charges

This is the percentage charged on your outstanding balance if you don't pay it off in full each month. Interest can really add up, so try to pay down your balance as much as possible to minimize this charge.

Annual fees

Some credit cards charge an annual fee just for having the card, even if you never use it. These fees can range from a small amount to hundreds of dollars, especially for cards with premium rewards programs. Consider whether the benefits of the card outweigh the annual fee.

Balance transfer fees

Moving your balance from one credit card to another can seem like a good way to snag a lower interest rate, but watch out for balance transfer fees. They typically show up as a percentage of the amount you transfer.

Cash advance fees

Need cash quickly? Using your credit card for a cash advance can be convenient, but it usually comes with a hefty fee, often a percentage of the amount withdrawn. Plus, interest starts accruing immediately on cash advances. You won’t get the same grace period you enjoy for regular purchases.

Penalty fees

Late payments, exceeding your credit limit, or a payment that’s returned because of insufficient funds can trigger penalty fees. These add up quickly, so it's important to stay on top of your credit card payments and manage your credit utilization.

How do lenders calculate finance charges?

Interest — the finance charge with the most potential to put you in debt — is primarily based on your annual percentage rate (APR) and your average daily balance. Remember that “rental fee”? That’s basically your APR, and your average daily balance is the average amount of money you owe each day of the billing cycle. The higher the APR, the more you pay for carrying a balance.

The finance charge formula

If you want to figure out how much you’ll owe in interest on a credit card, this simple formula can help:

Finance charge = Average daily balance x daily periodic rate x number of days in billing cycle

Here’s how to use the formula:

Average daily balance. Add up your balance each day of the billing cycle and divide by the number of days in the cycle.
Daily periodic rate. Divide your APR by 365 (the number of days in a year).
Number of days in billing cycle. Most billing cycles last for around 30 days, but check your statement to confirm.

Say you want to figure out how to find the finance charges on your next credit card bill. Let’s pretend your average daily balance for the month is $1,000, your APR is 18%, and your billing cycle is 30 days.

Follow these steps to figure out the total interest you’ll pay:

Convert the APR to a decimal. Since APR is a percentage, divide 18 by 100 to turn it into a decimal: 0.18.
Find the daily periodic rate. Divide 0.18 by 365 to get a daily periodic rate of approximately 0.00049315.
Plug the numbers into the finance charge formula. It should look like this: Finance charge = $1,000 x 0.00049315 x 30.
Run the calculation. Your finance charge for the month would be $14.79.

Finance charges and regulations

Several laws and regulations aim to protect consumers from unfair lending practices. One of the most important is the Truth in Lending Act (TILA), which has been around since 1968.

TILA is a federal law designed to ensure you have clear, accurate information about the cost of credit. TILA requires lenders to:

Disclose all finance charges clearly and conspicuously, including the APR, fees, and the total cost of the loan.
Calculate and disclose the APR in a standardized way so you can compare the true cost of borrowing from different lenders.
Allow borrowers in certain situations to cancel a loan agreement within three business days of signing.

Other federal and state laws offer further protection against predatory lending practices. Some states cap interest rates, limiting the amount of interest a lender can charge. And others have regulations for payday loans, which are notorious for charging high interest rates with very short repayment terms. Research the rules in your area and know your rights.

How to lower (or avoid) finance charges: 5 tips

Finance charges can put a real dent in your wallet, but here are some tips to help you keep more of your hard-earned money:

Pay your statement balance in full each month. By paying your balance in full, you avoid paying interest on the money you borrowed.
Pay at least the minimum balance by the due date. If you can’t pay off your full balance, pay at least the minimum on time to avoid late payment fees.
Use a low-intro APR card for big purchases or balance transfers. Cut costs by using a card with a low introductory interest rate for big purchases or debt consolidation.
Set spending alerts. Many credit card issuers offer mobile apps that let you set spending alerts so you get a notification when you’re close to your limit.
Choose cards with no annual fees. Annual fees add up, especially when you have multiple cards. Avoid these charges by opting for credit cards with no annual fee when possible.

Skip the finance charges with EarnIn

One of the best ways to prevent out-of-control finance charges is by keeping tabs on your credit report. EarnIn’s Credit Monitoring tool lets you keep a close eye on your credit score¹ so you can make better borrowing decisions. You’ll even receive alerts about suspicious activity to help you catch fraud early enough to act.

But Credit Monitoring isn’t the only tool EarnIn offers to keep your finances in line. Cash Out lets you access your pay as you work — up to $150/day with a max of $750 between paydays with no interest, no credit check, and no mandatory fees.² It’s a great way to help you pay your bills on time without overdrawing your account.

Download EarnIn to make every day payday.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

1. Calculated on the VantageScore 3.0 model. Your VantageScore 3.0 from Experian® indicates your credit risk level and is not used by all lenders, so don't be surprised if your lender uses a score that's different from your VantageScore 3.0. EarnIn services may not be available in all states. Learn more: https://www.experian.com/assets/consumer-information/product-sheets/vantagescore-3.pdf

2. A pay period is the time between your paychecks, such as weekly, biweekly, or monthly. EarnIn determines your daily and pay period limits (“Daily Max” and “Pay Period Max”) based on your income and financial risk factors as outlined in the Cash Out Maxes section of our Cash Out User Agreement. EarnIn reserves the right to adjust the Daily Max and Pay Period Max at its discretion. Your actual Daily Max will be displayed in your EarnIn account before each Cash Out. EarnIn does not charge interest on Cash Outs or mandatory fees for standard transfers, which usually take 1–2 business days. For faster transfers, you can choose the Lightning Speed option and pay a fee to receive funds within 30 minutes. Lightning Speed is not available in all states. Restrictions and terms apply; see the Lightning Speed Fee Table and Cash Out User Agreement for details and eligibility requirements. Tips are optional and do not affect the quality or availability of services.