There are a number of different types of finance charges that can be charged on credit accounts; these charges are considered to be the "cost" of borrowing funds or of having access to credit. Some of the most common finance charges are interest charged on a loan, or transaction fees associated with making a charge or a payment. Late fees are also a type of finance charge, and yearly fees for holding a credit card are technically another type, even though they typically do not vary the way interest charges do.
When opening any type of credit account or borrowing money, it is very important to research and understand all the possible finance charges, since these can be very costly over time. It is important to learn the interest rate, which is also referred to as the annual percentage rate, and abbreviated APR; determine whether it is fixed or variable. It is also necessary to understand how the interest is compounded; whether it is based on a monthly balance or the average daily balance, for example, or if it is simple interest that is determined up front based on the amount of the loan. All of these different types can have a significant impact on the amount of finance charges paid over the life of the loan or credit account.
Other finance charges can often be avoided, such as late fees. These fees occur when payments are made late, or for less than the amount that is owed. Making sure to always pay bills on time, even if it is only possible to make the minimum payment, is the best way to avoid late fees. Some companies may also charge transaction fees if a purchase is made on a line of credit, though this will be specified in the contract when it is set up.
Some credit cards charge yearly fees for holding the card, whether the account holder uses it or not. In general, unless the credit card has a fantastic rewards program that cannot be matched by a free card, it is best to avoid cards with yearly fees. There are plenty of credit cards out there that offer rewards, and which are free to use, with the exception of interest of course. It is best to go through all of one's accounts regularly and determine the amount of finance charges paid over the year; sometimes, it is possible to find alternatives that can help to save a lot of money.
