1. Money

6 Ways Finance Charges Are Calculated

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Finance charges are applied to credit card balances that aren't paid before the grace period. Different credit cards calculate finance charges in different ways. To find out how your creditor calculates your charge, look on the back of a recent billing statement. You should find an explanation there.

Below are six ways finance charges can be calculated. Click on the links for a more detailed explanation including example of how the charge works.

Adjusted Balance

The adjusted balance method uses the balance at the beginning of the billing cycle and subtracts any payments you made. Purchases are not included in the balance. This is the least expensive method of calculating finance charges.

Average Daily Balance

The average daily balance method uses the average of your balance during the billing cycle. Each day's balance is added together and divided by the number of days in the billing cycle This is the most common way finance charges are calculated.

Daily Balance

The daily balance method uses the balance each day of your billing cycle. Each day's balance is multiplied by the daily rate and added together.

Double Billing Cycle

The double billing cycle uses the average daily balance of the current and previous billing cycles. This is the most expensive way finance charges are calculated. Fortunately for credit cardholders, the double billing cycle method of calculating finance charges is now against the law.

Ending Balance

The ending balance method uses your beginning balance minus payments plus charges made during the billing cycle. The number of days in the billing cycle doesn't affect the amount of the finance charge.

Previous Balance

The previous balance method uses the balance at the beginning of the billing cycle which is also the ending balance of the last billing cycle. No payments or charges are included. The number of days in the billing cycle doesn't affect the amount of the finance charge.

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