Cost of Credit

The cost of credit generally refers to the interest rate that is paid. The rate of interest attached to a particular credit situation is influenced by a variety of factors. Primary among these are the amount of the loan or desired credit, the amount of time that the credit is extended or how long it will take the consumer to pay, and information from the consumer’s credit report.

The cost of credit includes the finance charge and the annual percentage rate. The finance charge refers to the total amount of money a consumer pays to use credit, including interest, service fees, and the like. The annual percentage rate refers to the credit cost, in terms of percentage, per year.

The cost of credit should be compared and evaluated before conducting credit related business, large or small. Understanding the cost of credit and developing the ability to use it to the consumer’s best advantage is a valuable person finance management skill.