Finance charges are any amount added to a bill that is not directly related to a purchase. Finance charges broadly define the many charges added to a credit card bill due to consumer borrowing.
Minimum finance charge
A minimum finance charge is a flat-rate fee added to a credit card bill. This minimum finance charge is applied to any balances that are not paid in full each month.
Typically, credit card companies have a minimum finance charge of $1. Thus, no matter the amount outstanding on a bill, the credit card company will charge $1. If the balance is $20, then the lender essentially makes 5% on the bill that month. Even though credit card interest rates are quite high, the minimum finance charge is often bigger than the actual amount of interest on credit card balances of less than $50.
Minimum finance charges also come into play for promotional offers. A balance of $5,000 at 0% APR should be charged zero interest. However, since the minimum finance charge is built into the card, the borrower will still be charged $1.
Why Minimum Finance Charges Exist
Minimum finance charges exist to cover the credit card company’s cost of doing business. Mailing statements costs the credit card company. Keeping track of payments to credit card balances takes man hours to sort and enter the payments into the system. These costs aren’t going to be paid by the credit card company – these costs are passed onto the customer!
Most of the time the minimum finance charge doesn’t matter to the cardholder. If you pay your bill in full each month, you’ll never pay a minimum finance charge. On the other hand, if you have a very high balance at a very high interest rate, then your interest charges will easily exceed the minimum finance charge.
The minimum finance charge for any particular credit card can be found in the terms of service and application. See the page on credit card offers to learn where finance charges are made transparent for borrowers.
Photo by: moonsheep
