Key Takeaways
- Minimum finance charges apply when the credit card interest falls below a set amount.
- Most credit cards charge a minimum finance fee of about $1.
- This fee is not frequently encountered because cardholders generally carry higher credit card balances.
- A minimum finance charge is different from a minimum monthly payment.
- Credit agreements detail all fees, including minimum finance charges.
A minimum finance charge is a fee assessed on cardholders when a small, ongoing outstanding balance is held on a credit card, limiting the amount of interest the card provider can charge. Minimum finance charges are usually a fixed amount, often $1, but sometimes as low as 50 cents. They only kick in when a borrower carries a very small balance due on their card each month that falls below the value the issuers feel is adequate to continue servicing the account.
Understanding How Minimum Finance Charges Operate
Not every credit card imposes a minimum monthly finance charge. Those that do will list it on the cardholder’s statement for that month. Cards that come with a special introductory interest rate, sometimes called a teaser rate, often waive this fee until the introductory period ends.
Practical Example of a Minimum Finance Charge
As an example, consider a credit card user who pays a 20% annual interest rate on their card’s outstanding balance. If the charges are calculated monthly, the monthly rate would be 1.67%. This borrower would have to pay a $1 minimum finance charge only if their balance was $60 or less at the end of the monthly billing cycle.
If their balance was $50, for instance, their regular interest charge would be 84 cents (1.67% times $50). In that case, the card issuer would bump it up to $1, adding an extra 16 cents to the charge.
Comparing Minimum Finance Charges and Minimum Monthly Payments
A minimum finance charge is not the same thing as a minimum monthly payment.
The minimum monthly payment is the smallest amount the cardholder is required to pay the card issuer that month. Otherwise, the account will be subject to late fees and possibly considered delinquent. That can have a negative effect on the individual’s credit score, making it more difficult and more costly for them to obtain other credit in the future.
Minimum monthly payments are typically calculated as a percentage of the outstanding balance, such as 1% to 4%, but sometimes as flat fees.
Credit card issuers are required to show on your billing statement how long it will take you to pay off your balance if you only make the minimum payment each month (and assuming that you don’t charge anything else in the meantime that would increase your balance).
Examining Minimum Finance Charges Alongside Other Credit Card Fees
Credit cards can come with a long list of different fees, and the minimum finance charge may be, quite literally, the least of a cardholder’s concerns.
The most common fees include:
By shopping around, you can often find a credit card that doesn’t charge certain fees or charges very low ones. For example, cards without annual fees are now relatively common and cards aimed at frequent travelers often make a selling point of having no foreign transaction fees. However, a card with low or no fees in certain categories may simply offset higher fees in the others.
And, of course, there are interest, or finance, charges on the balance due on the card. As of July 2023, the median interest rate on the cards in Investopedia’s credit card database was 23.99%. Those rates can vary widely based on a card applicant’s credit score and other factors. They are also subject to change for any of a variety of reasons (though the new rate can be charged only to balances on new purchases, not outstanding balances, except in certain circumstances).
The minimum finance charge and all other fees and charges will be detailed in the cardholder’s credit agreement.
How Can You Find Your Credit Card Agreement?
If you didn’t save the credit card agreement your card issuer provided initially, there are simple ways to obtain it. Many card issuers post their credit card agreements online, so it may just be a matter of looking up your particular card. In addition, card issuers are required to provide a copy of your agreement on request, so a call to your bank or other issuer should get you one.
Can a Credit Card Issuer Change the Terms of Your Credit Agreement?
According to the Consumer Financial Protection Bureau, credit card issuers have the right to change the terms of your credit card agreement. However, the CFPB notes, “For significant changes, the card issuer generally must give you notice 45 days in advance. Significant changes generally include increases in certain interest rates and fees, increases to the minimum amount due, or changes to the grace period or the way interest is calculated.” That’s one reason it’s a good idea to look over any mail from your credit card company and not just throw it away unread.
Will Carrying a Low Balance on Your Credit Card Affect Your Credit Score?
The most important factor in building and maintaining a strong credit score is to pay your credit bills on time each month. With regard to your outstanding balances, it’s usually a good idea to keep them as low as possible. That’s because credit scoring formulas consider how much debt you currently have outstanding as a percentage of all the credit available to you, a figure known as your credit utilization ratio. As a general rule, cardholders should try to keep that percentage below 30%.
The Bottom Line
The minimum finance charge is a small fee and often irrelevant for people who run significant balances on their credit cards, as well as those who pay their balance off in full each month. There are many other credit card fees that are worth paying more attention to—and trying to avoid if at all possible.