Best method to Calculate Finance Charge

The first thing to do here is to get the APR divided by the billing cycle to give 20/4 = 5.

Finance charge calculation

Getting your finance charge calculated yourself is a good thing because there might be problem in the course of calculation by another person or entity. If you also want to make your finance charge private, it is also a good thing to learn howto calculate your finance charge yourself. The report from the credit card will surely and certainly show the finance charge but calculating your finance charge yourself will really help out in many cases like in the case in which the bank makes mistake in the finance charge calculation in the credit card report.

There are numbers of some terms that should be known when calculating the finance charges. Terms like the APR, the credit card balance and the billing cycle. When the significant figure on the interest is missing, it gets difficult calculating the finance charge and it might not be calculated at all.0 is a non-significant figure which makes finance charge impossible to calculate when it occurs in a calculation.

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There are some methods in which a finance charge can be calculated but the simplest of all the methods is the one in where there is multiplication of the credit card balance with the division of APR (Annual Percentage Rate) and billing cycle. For example, a 5 months billing cycle with Annual Percentage Rate of 20% and a credit card balance of $200.

The first thing to do here is to get the APR divided by the billing cycle to give 20/4 = 5. The result is then multiplied with the credit card balance to give $1000 ($200 * 5).  So the monthly finance charge is $1000.

Let us now assume the billing cycle is less than a month, there is also another method in calculating that. This method is getting the APR and credit card balance multiplied first. The number of days for the billing cycle is also divided by 365 days.

The two results are then multiplied to give the finance charge. For example, a 20 day billing cycle is less than a month with an APR of15% and a credit card balance of $150. The credit card balance when multiplied by the APR giving us 2250 (15 * 150 = 2250). The 20 day billing cycle is divided by 365 to give 0.0548 (20/365 = 0.0548). The two results are then multiplied together to give $123.3 (0.0548 * 2250).

In the calculation above, the finance charges reduced because of the reduction in other figures which means the lower the days the lower the finance charge but if the figures are all the same, the finance charge will correspond to the charges which it should be for each day.

Four methods to calculate finance charge

There are other four methods for the calculation of the finance charges and they are all summarized below;

  • Ending balance method. This is a method which banks uses and considered to be their simplest method. This calculation is done by making use of the balance at the end of billing cycle. The final balance in the account is always their point of use at the end of every billing cycle.
  • Previous balance method. This is mostly used with ending balance method. This is usually calculated using the previous balance at the end of the billing cycle.
  • Adjusted balance method. This method is calculated by subtracting the balance of the credit card at the beginning of every billing cycle from the payment which was made during when the cycle was still going on. This can be difficult to calculate at times.
  • The daily balance method. This method requires the knowledge of knowing the actual balance of the daily credit card. This daily balance is multiplied with each day of the billing cycle before getting the result multiplied by the APR which has been divided by 365 days.
  • For example,if the daily credit balance is $10 and you have your APR to be 1%, to get your interest rate for the end of the 10 days billing cycle. You multiply $10 by 10days which is $100. Divide your APR by 365 days which should give 0.0000273. Multiply the two products to give you $0.00273 that is 100 * 0.0000273 =$0.00273. The interest to be paid back is $0.00273.
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Harish is the editor at howto Finance. Here we publish high quality trending news topics on Business, Finance, Loans and Credit-Cards etc. Our editorial includes worldwide topics.

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