How to Calculate Your Own Finance Charge
With so many consumers using credit cards today, it is important to know exactly what you are paying in finance charges. Different credit card companies use different methods to calculate finance charges. Companies must disclose both the method they use and the interest rate they are charging consumers. This information can help you calculate the finance charge on your credit card.
Know what a finance charge is. Credit card terms can be confusing to navigate for many, so understand what a finance charge is and how it affects you.
A finance charge is what allows credit card companies and lenders to make a profit off of you. It’s more or less a fee charged for the use of your credit card. Finance charges on credit cards are usually flat rates, as opposed to finance charges on mortgages and cars, which have ranges that depend on a person’s credit score.
A finance charges is the total cost of borrowing, including interest, fees, and any other charges the borrower pays.
Knowing the finance charge of your credit card can help you budget better and determine how much money you’re really saving with a particular credit card.
Figure out which method your bank uses. Most banks calculate a finance charge using one of two methods: one-cycle finance charge including purchases, or one-cycle finance charge not including purchases.
The methods require a different means of calculation. The name of the methods your creditors use should be listed somewhere on your monthly statement. You need to identify the method before you proceed to calculate your score.
Gather the necessary numbers. A variety of numbers go into each equation for calculating a finance charge. Before you sit down and being punching numbers into your calculator, make sure you know the following information:
The outstanding balance on your credit card. That is, the total amount you owe.
The number of days in each billing cycle.
Please note, that depending on the method your bank uses you may need to calculate new purchases into your outstanding balance and not just go off of whatever’s written on your bill.
Calculate the average daily balance including new purchases. This is generally the most common method credit card companies use to calculate a finance charge.
It is also the most expensive, as new purchases and balances are accounted for immediately with no grace period to avoid accruing interest. Some credit card companies allow a grace period between the purchase date and the date the bill is due, so that if you pay your bill completely on time, there is no interest charged.
Calculate the average daily balance excluding new purchases. Sometimes, new purchases are not accounted for when adding up your outstanding balance.
Understand the implications of each method. These two methods, while similar, are vastly different in how they affect you as a credit card user. Read More