Debitoor's accounting dictionary
Finance charge

Finance charge - What is a finance charge?

A finance charge occurs when a fee is charged, usually in the form of interest, when money is borrowed on credit

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A finance charge generally takes one of a few different forms. It can be based on a percentage of the total amount borrowed, or it is based on a flat rate. Finance charges can occur on a regular basis, or as a one-time payment.

The most common kind of finance charge comes from credit card balances. Finance charges can also refer to other fees involved in borrowing money, such as late fees or transaction fees.

Finance charges usually occur when you carry over a balance on loaned money from one period to the next. However, in some cases such as a cash advance from a credit card, it could be necessary to pay a finance charge even if you repay the original amount in full before the next payment date.

The purpose of finance charges

The reason that finances charges are made is to give lenders a source of profit for providing the loan. In other words, finance charges act as a type of compensation. Finance charges can differ greatly depending on the type of loan, and even between lenders.

How lenders determine the finance charge

When it comes to interest on the remaining balance due from the amount borrowed, the percentage finance charge, in the case of a credit card for example, depends on the creditworthiness of the individual borrowing the money.

Creditworthiness takes into consideration the history of your repayment of money borrowed. It helps lenders determine how likely and how quickly you will pay back the loan (if at all).

In many countries, there are regulations in place that help to prevent the finance charges from becoming too high. However, they still can fail to prevent practises such as predatory lending, wherein a lender provides money that comes with high fees (over 25%).

Calculating finance charges

There is no one specific way of calculating finance charges, as they can differ depending on the type of loan or on the company that has provided the loan.

Credit card finance charges (interest)

Credit card finance charges, for example, typically take the average daily balance on the card over the given period (usually month to month, based on the date the credit card was activated).

For example: Tyler charges £347 on his credit card over the course of a month. He pays back £100 by the due date for the amount, but he still has a balance of £247. If he doesn’t make any more charges on the card over the next month billing period, then he will see finance charges for the £247 that he has borrowed.

If his APR (Annual Percentage Rate) is 21% and his billing period is 29 days, then the credit card company will multiply the £247 by 0.21 then by 29 to determine the annual amount of £1,504.23. This will then be divided by 365 to get the finance charge of £4.12, which will be added to the £247 balance on his next statement.

Finance charges and Debitoor

In your Debitoor account, fees encountered through credit card transactions, for example, from SumUp sales are automatically registered as expenses, making it easier to manage these kinds of charges.

It’s also possible to mark remaining balances on invoices (for example, if the amount received and matched to the invoice is slightly less than the total invoice amount), it’s possible to easily mark the remainder as a finance charge in just a few clicks.

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