How to Calculate Finance Charges
Finance charge calculations may seem complicated at first, but the steps involved in determining charge amounts can be relatively simple. Knowing how to calculate finance charges yourself can give you an advantage in planning your debt repayment strategies or when considering a new credit agreement.
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Things You'll Need
- Current billing statement
- Copy of credit agreement
- Calculator or spreadsheet software
- Access to current prime rate, if applicable
Instructions
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Determine Your Periodic Interest Rate
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1
Determine your annual percentage rate. Check your most recent billing statement or contact a company representative to obtain your current interest rate.
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2
Divide your APR by the number of billing periods per year. The number of billing periods is most likely to be 12 if you make monthly payments. If your account features a fixed interest rate, the quotient found in this step will be your periodic interest rate.
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3
If you have a variable interest rate, check the current prime rate and add the appropriate percentage before completing the calculations in Step 2. Check your credit agreement or contact a representative to find out exactly how much is added to the prime rate to determine your APR. See Resources for a link to help determine the current prime rate.
Calculate Finance Charges
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4
Consult your credit agreement or speak with a company representative to determine the method of finance charge calculation used on your account. According to finweb.com, your credit provider is likely to use one of five popular methods of calculation: the adjusted balance method, the average daily balance method, the two-cycle average daily balance method, the previous balance method, or the ending balance method.
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For the adjusted balance method, subtract the payment amount made during the month from the month's beginning balance, and multiply the difference by your periodic interest rate to determine that period's finance charges.
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6
For the average daily balance method, add the balance in the account for each day in the period, then divide the sum by the number of days in the period. For the two-cycle average daily balance method, perform the same calculation using two billing periods rather than one. Multiply the quotient (the average) by the number of days in the period, then multiply the product by your periodic interest rate to determine the current month's finance charges.
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7
For the previous balance method, multiply the current period's beginning balance by your periodic interest rate. For the ending balance method, perform the same calculation using the ending balance.
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Tips & Warnings
Finance charge calculators are available online to assist you in making these calculations. The calculators are designed to display finance charges over a range of rate and time combinations.
References
Resources
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