How to Figure Out Credit Card Finance Charges
A finance charge is the amount of money a credit card company charges you for the use of the credit card. According to the Federal Trade Commission, there are several methods used by different companies for calculating these charges on your credit card. Information about what computation your credit card company uses can often be found in your credit card terms and condition disclosure, on your credit card bill, or by contacting your credit card company. Some calculation methods are more advantageous to cardholders, while others benefit the credit card company.
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Instructions
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Credit card companies commonly take the average daily balance on your credit card to calculate finance charges. Add your daily balances, including all payments and transactions for that day, and divide the sum by the number of days in the billing cycle to get your average daily balance. Your statement generally displays the number of days in the billing cycle.
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Adjusted-balance finance charges are calculated by taking the balance of your previous cycle's statement and subtracting any payments made for the current month. Calculate the closing balance on your last month's statement and subtract any payments made during your current cycle. The remaining amount is what your creditor will use to apply finance charges.
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The previous balance calculation method uses your last month's closing balance---the amount owed on your statement closing date---to determine your finance charge, but it ignores any payments made during the current bill cycle. To find the amount your creditors will use for their finance charge calculation, you will need to review your most recent statement; the closing balance on that statement is used to determine your finance charge.
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Double-cycle billing uses your current month and previous month average daily balance to calculate finance charges. Say last month your statement closed with an amount of $173, and this month your statement closes out with $300. You will need the sum of these amounts to calculate your finance charges.
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Take your interest rate and divide the percentage by 100 to get the appropriate decimal amount for your equation. Divide the new decimal amount by the amount of billing cycles in the year---this is your periodic rate. Multiply your periodic rate by either your closing statement amount or your average daily balance, depending on the calculation method your creditor uses. The total should roughly represent your finance charge.
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Tips & Warnings
To avoid any finance charges, pay off your statement ending balance in full by the end of the grace period.
If your card issuer uses the double-cycle billing method, you may still accrue a finance charge for the previous bill if you do not pay the current bill in full.
