How to Calculate the Periodic Finance Charge

Calculating the periodic finance charge allows you to determine the amount of interest owed on an account for a specific billing period. The periodic finance charge annualizes the interest charge based on the current account balance owed and the contracted annual percentage rate. Once annualized, you can determine the daily periodic interest rate and convert this information into the periodic finance charge based on the number of days in the billing cycle.

Instructions

1. Determine the current balance for the account. For example, assume the current balance owed on an account is $5,000.

2. Determine the annual percentage rate for the account. For example, assume the account has an APR of 20 percent.

3. Multiply the APR express as a percentage by the current balance. Continuing the same example, $5,000 x .20 = $1,000. This represents the annual finance charge based on the current account balance.

4. Divide the annual finance charge by 365, the number of days in a calendar year. Continuing the same example, $1,000 / 365 = $2.74. This figure represents the daily finance charge based on the current account balance.

5. Multiply the daily finance charge by the number of days in the periodic statement period. For example, assume the current periodic statement period contains 30 days. Continuing the same example, 30 x $2.74 = $82.20. This figure represents the periodic finance charge for the account.

References

• "Principles of Finance"; Scott Besley et al.; 2008
• Digital Federal Credit Union: Calculating Finance Charges