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What are Finance Charges in Credit Card?
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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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Credit cards are versatile financial tools that allow you to purchase without cash. As the lender offers you a large sum, they want compensation in case of missed payments. It includes finance charges on credit cards. These charges can quickly increase your monthly credit card bills, leading to high debts and financial stress. This blog will discuss what finance charges mean on credit cards, how they are calculated, and tips for reducing them.
What are Finance Charges in Credit Cards and their Type?
Credit card finance charges are the fees that banks like Kotak Mahindra Bank charge for using their credit card services. These fees are added to the outstanding balance on the card and are calculated based on the card's annual percentage rate (APR).
Your credit card finance charges are calculated differently for each credit card, so understand the terms and conditions of your card to avoid paying high fees. The following are the types of finance charges on credit cards.
How are Finance Charges Applied to Credit Cards?
Banks like Kotak Mahindra Bank use different methods to calculate finance charges on credit cards. It is essential you understand the techniques. The following are the most common methods used to calculate finance charges on credit cards.
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Key Factors that Affect Credit Card Finance Charges
Several factors affect the finance charges on your credit card. It is essential to know about these factors and avoid paying high fees. The following are the key factors that affect credit card finance charges.
Tips for Avoiding or Reducing High Finance Charges on Credit Cards
Now that we have discussed what finance charges are and how they are calculated, let us discuss some tips for reducing them.
Also Read: How is Interest Charged on a Credit Card
Conclusion
Finance charges on credit cards can quickly add up and lead to high debts and financial stress. You must understand finance charges, how they are calculated, and the factors that affect them. By following the tips discussed in this blog, you can avoid or reduce high finance charges on your credit card. So check your credit card usage regularly and make informed decisions to manage your finances effectively.
Credit Card Finance Charges FAQs
Q1. How are finance charges calculated?
Finance charges on credit cards are calculated based on the APR of the card and the outstanding balance on the card. At Kotak Mahindra Bank, we use different methods to calculate finance charges, such as the daily and average daily balance methods.
Q2. What Fees are Included in a Credit Card Finance Charge?
Cash advances, balance transfers, and late payment fees are all examples of credit card finance charges. Cash advance fees apply when you withdraw cash with your credit card, whereas balance transfer fees apply when you transfer a balance from one credit card to another. Late payment fees are assessed when you fail to make your minimum payment on time. All of these are included in your bills as finance charges.
Q3. What is the formula for credit card finance charges?
The finance charge formula is Finance charge = Carried unpaid balance × Annual Percentage Rate (APR) / 365 × Number of Days in Billing Cycle. Let's assume that you made a purchase of INR 10,000 on your credit card on March 1st, 2023, and an interest rate of 3% per month applied, and as of March 27th, 2023, your outstanding balance on the credit card is INR 5,000 since you failed to pay the full balance. There are 27 days between March 1st, 2023 and March 27th, 2023. As per the formula, the finance charge will be: INR 41.37 = (27 x 5,000 x 0.03 x 12)/365.
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