You can calculate finance charges as long as you know three numbers related to your credit card account: the credit card (or loan) balance, the APR, and the length of the billing cycle.
Calculating Finance Charges the Simple Way
The simplest way to calculate a finance charge is: For this example, we’ll say that each billing cycle lasts a month (so there are 12 billing cycles in the year) and that you have a $500 credit card balance with an 18% APR. For this example, we’ll say that each billing cycle lasts a month (so there are 12 billing cycles in the year) and that you have a $500 credit card balance with an 18% APR.
Calculating Shorter Billing Cycles
The billing cycle for credit cards can be shorter than a 30-day month to accommodate weekends and holidays. If so, calculate the finance charge as follows: Example: If your billing cycle is 25 days long, the finance charge for that billing period would be: You might notice that the finance charge is lower in this example even though the balance and interest rate are the same. That’s because you’re paying interest for fewer days, 25 vs. 31. The total annual finance charges paid on your account would end up being roughly the same.
Variations in Credit Card Issuer Finance Charge Calculation Methods
The examples we’ve done so far are simple ways to calculate your finance charge but still may not represent the finance charge you see on your billing statement. That’s because your creditor will use one of five finance charge calculation methods that take into account transactions made on your credit card in the current or previous billing cycle. The ending balance and previous balance methods are easier to calculate. The finance charge is calculated based on the balance at the end or beginning of the billing cycle. The adjusted balance method is slightly more complicated; it takes the balance at the beginning of the billing cycle and subtracts payments you made during the cycle. The daily balance method sums up your finance charge for each day of the month. To do this calculation yourself, you need to know your exact credit card balance every day of the billing cycle. Then, multiply each day’s balance by the daily rate (APR/365). Add up each day’s finance charge to get the monthly finance charge. Credit card issuers most often use the average daily balance method, which is similar to the daily balance method. The difference is that each day’s balance is averaged first, and then the finance charge is calculated on that average. To do the calculation yourself, you need to know your credit card balance at the end of each day. Add up each day’s balance and then divide by the number of days in the billing cycle. Then, multiply that number by the APR and days in the billing cycle. Divide the result by 365.
