What Are Finance Charges?

March 8, 2012 — 1,007 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

A finance charge is the fee charged for the use of credit or the extension of existing credit. Credit card companies, banks and other financial institutions use finance charges to make money on consumers who use a line of credit or loan. The charge will either be a flat fee or a percentage of the total amount borrowed.

Common finance charges include car loans, mortgages and credit cards. These all have known ranges that will depend on the credit score of the individual applying for the loan. However, there are a variety of loans and lenders available and they may set the finance charges at a much higher rate.

A finance charge will include the interest to the balance, service fees for transactions, late fees and balance transfer fees. However, many loans of credit will incorporate the finance charges directly in the overall cost of the loan.

The Truth in Lending Act requires companies to include information on any and all potential finance charges that may be applied to the transaction. Informed financial decisions can help a business or consumer apply for a lending option with limited finance charges.