Definition
A finance charge is a fee on a credit account that is based on an interest rate charged to the balance of the account during that billing cycle.
Analysis
Finance charges are added to credit card balances monthly whenever an amount is carried over from one month to the next. Finance charges are calculated by multiplying the daily periodic rate by the average daily balance on the account. This is an example of compounding daily.
Interest on installment loans is compounded monthly. A finance charge may be added monthly to an installment loan based on the loan balance and the number of days in that month. Finance charges are very close to what is specified on an amortization schedule, although the actual charges may vary based on the number of days in each month.
