What Is a Minimum Finance Charge?
A minimum finance charge is the least amount of interest a borrower will have to pay their credit card company in a particular billing cycle if a balance has accrued. For most credit cards the minimum finance charge is usually $1.00. Thus, the minimum finance charge is basically only a consideration when a borrower has accrued a small outstanding balance on their account.
The minimum finance charge may also be known as the minimum interest charge.
Minimum Finance Charge Explained
Minimum finance charges will be detailed in a borrower’s credit agreement if the creditor has a minimum finance charge policy. Some cards do not have any minimum finance charges. Borrowers should read their credit agreement closely to best understand how minimum finance charges are applied.
All revolving credit products include finance charges also known as interest charges. Interest charges will vary by the product’s interest rate and interest accrual procedures. Interest charges on revolving credit accounts are added to a borrower’s outstanding balance monthly, however most lenders charge daily interest.
In broader terms, finance charges may also refer to fees beyond just interest such as upfront fees in a non-revolving loan or monthly maintenance fees charged by a credit card company. These fees are typically charged at an established rate, therefore, no minimums would apply. Borrowers should also review their credit agreement to understand how the lender assesses all types of fees including interest and any maintenance fees.
Minimum Finance Charge Considerations
If a borrower carries no balance from month to month on their credit card, then they will not have to worry about paying any interest finance charges. However, most borrowers do carry a balance and therefore closely follow the monthly finance charge that they are assessed.
Minimum finance charges are usually very low and are typically not a factor for borrowers regularly carrying over balances since their interest charges will exceed the minimum balance. Most credit card companies will have a minimum finance charge of $1.00 or less. This minimum finance charge would therefore only be assessed at the end of a month when a borrower’s monthly accumulated interest was $0.99 or less.
For example, consider a credit card borrower that pays a 20% annual interest rate with monthly interest assessed at a rate of 1.67%. This borrower would theoretically need to have a balance of $60 or less at the end of a monthly billing cycle to be charged a minimum finance charge of $1.00.
Some cards may have no minimum finance charges at all. Introductory rate periods on new credit cards also provide a scenario where a borrower would incur no minimum finance charge. In this situation, a borrower is not charged any interest until the introductory rate period expires, at which time a minimum finance charge would be required if is detailed in the credit terms.