How Are Credit Card Finance Charges Calculated?

The finance charge is the interest rate that you pay on your credit card balance. It forms the most significant part of your costs, so always make credit card comparisons to find the best rate.

There are different methods that credit card companies use to calculate these charges.  

There are several ways that a credit card company can use to determine your outstanding balance. The method used can make a huge difference in your finance charges:

	Over one billing cycle or two cycles,
	Using the adjusted balance, the average daily balance, or the previous balance, and
	Including or excluding new purchases in the balance.

Generally, the two-cycle billing method is more costly. It includes the average of the current and previous month to determine the balance. Because this is confusing and costly to most consumers (and even to us!), The Federal Reserve Board may soon implement a new rule that eliminates this method.

Depending on the amount of your balance and the timing of your purchases and payments, your finance charges will usually be lower with one-cycle billing and either:

	The average daily balance method excluding new purchases,
	The adjusted balance method, or
	The previous balance method.

Minimum finance charge
Some credit cards have a minimum finance charge that you must pay whenever you carry a balance. For instance, your finance charge may be calculated to be 35¢, but if the minimum finance charge is $1.00, then you will pay $1.00.

 

 

 

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