How Credit Card Finance Charges are Calculated
The finance charge for your credit cards is usually
determined by the amount of your outstanding balance on
your card account and the current APR (Annual Percentage
Rate) you are being charged. Card issuers tend to use one
of three ways to determine your charges. The outcome of
theses various formulas is not the same; so it pays to know
the differences literally. is the dollar amount you pay to
use credit. The amount depends in part on your outstanding
balance and the APR.
 
Credit card companies use one of several methods to
calculate the outstanding balance. The method can make a
big difference in the finance charge you'll pay. Your
outstanding balance may be calculated using the adjusted
balance, previous balance (sometimes referred to as
two-cycle), or the average daily balance as the reference
point. Check your card agreements terms if new purchases
and/or cash advances are also included or excluded as this
varies from provider to provider.
 
The average daily balance is the most common calculation
method for interest and or finance charge rates. Everyday
in the billing period, your balance is updated with any
credits or refunds. With some credit card issuers, any new
purchases are also added. When the end of the billing cycle
comes around, daily balances are added and divided by the
number of days in the billing cycle to arrive at the
"average daily balance."
 
The adjusted balance method is the most beneficial method
for cardholders. Credits received during the current
billing cycle are deducted from the balance at the end of
the previous billing cycle. Purchases and/or cash advances
made during the billing cycle are not reflected in the
total. Basically, if you pay your bill before the end of
the billing cycle you don't get stuck with finance charges.
 
With the previous or two-cycle balance method, the average
daily balance is figured from two billing cycles rather
than a single one. As a consequence, this increases the
finance charges one must pay normally. There usually is no
grace period included with this method and if the bill is
not paid in full the interest may be made retroactive back
to the original purchase date.
 
It is also important to note that many credit cards also
carry a minimum finance charge. Regardless if your
calculated finance charge is lower, you will still be
required to pay this charge. However, if no purchases or
cash advances have been made during the duration of the
billing cycle, generally you will not be assessed and
charges. Nevertheless it is generally wiser to check the
particular card in question's terms of service and fee
schedule.
 
 
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Sam Donaldson is the staff writer for
various types of business, gas, and airline rewards credit
cards.
 
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