Credit Card Basics: Minimum Finance Charge

If you have already experienced the convenience and flexibility of credit card use or are choosing your first plastic now, you probably saw a line "minimum finance charge" in most credit card agreements. Our article will help you to understand the meaning of this important term. A minimum finance charge is a payment imposed by a credit card issuer on your remaining balance. It only applies when the interest charge is less than the minimum finance charge. The rates can vary depending on the credit card issuer, but they are typically less than 50 cents.

If you prefer to pay your credit card balance in full during the grace period, it benefits you in many ways. First of all, you do not accumulate debt. That lets you avoid the main reason of financial stress. Then, you are free of paying interest, so you can save money on credit costs. And having no annual fee credit card, you do not even need to pay for the maintenance of the plastic. So clearing your debts every month can mean having nearly free loans. Moreover, rewards programs will let you receive a part of your spending back. You will earn bonus points or cash back that you don't need to pay back to the credit card issuer.

However, this spending pattern is not typical for all US residents. There are a lot of people who carry their credit card balance from month to month.

In this case you need to pay all necessary interest payments imposed by the credit card issuer. But what if you carry a one dollar balance on your plastic? Your interest charges on such a balance can be less than 20 cents. However, if your interest payments for a month are less than your minimum finance charge, than the credit company may apply the minimum finance charge instead of the interest payments. Its amount is listed on your credit card agreement or on your monthly statements. So if your interest payments are 20 cents, but your minimum finance charge is 50 cents, the credit company would charge you 50 cents according to your credit card terms and conditions.

If, for example, your credit card balance is $100, the company will charge your regular interest rate because its amount will exceed the minimum finance charge. For example, a 12% APR on $100 would mean that you have to pay $12 a year or $1 a month. It is more than your minimum finance charge.

If there are no balances subject to the interest charge, the credit card issuer won't apply a minimum finance charge. That's why it is recommended to pay off small credit card debts in full. Moreover, eliminating your debt will also improve your credit score. And the better is your credit, the less is your credit cost. Having positive credit history will let you find credit card issuers that do not impose a minimum finance charge. That can reduce your interest payments and help you save money.