Calculate Your Own Financial Cost

Whenever you carry a credit card balance beyond the grace period (if you have one), you will be assessed interest in the form of a finance charge. Luckily, your credit card statement will always contain your finance charges, when you’re billed, so you don’t have to calculate it yourself. Knowing how to do the calculations yourself can be useful if you want to know the expected finance charge on a specific credit card balance or verify that your finance charges have been properly billed.

You can calculate finance charges as long as you know the three numbers associated with your credit card account: credit card (or loan) balance, APR, and billing cycle length.

Calculating Financial Costs in a Simple Way

The simplest way to calculate finance costs is:

balance X monthly rate
class=”ql-syntax”>

For this example, we’ll say that each billing cycle lasts a month (so there are 12 billing cycles in a year) and you have a $500 credit card balance with an APR of 18%.

For this example, we’ll say that each billing cycle lasts a month (so there are 12 billing cycles in a year) and you have a $500 credit card balance with an APR of 18%.

0.18/12 = 0.015 or 1.5%
class=”ql-syntax”> .18/12 = 0.015 or 1.5%
class=”ql-syntax”> 500 X 0.015 = $7.50
class=”ql-syntax”>

READ ALSO:   What is Dividend Investment?

Calculating Shorter Billing Cycles

The billing cycle for credit cards can be shorter than a month of 30 days to accommodate weekends and holidays. If so, calculate the financial burden as follows:

balance X APR X days in billing cycle / 365
class=”ql-syntax”>

Example: If your billing cycle lasts 25 days, the finance charges for that billing period are:

500 x 0.18 X 25 / 365 = $6.16
class=”ql-syntax”>

You may notice that the finance charge is lower in this example even though the balance and interest rate are the same. That’s because you pay interest for fewer days, 25 vs. 31. The total annual finance fees paid to your account will be approximately the same.

Variation of Credit Card Issuer Financial Fee Calculation Method

The examples we’ve done so far are simple ways to calculate your finance charges but may still not represent the finance charges you see on your billing statement. That’s because your lender will use one of five finance charge methods that account for transactions made on your credit card in the current or previous billing cycle.

Check your credit card agreement or the back of your credit card statement to determine how your finance charges are calculated and whether new purchases are included in the balance calculation.

READ ALSO:   Dogecoin vs. Bitcoin: How Does it Compare?

The ending balance and previous balance methods are easier to calculate. Finance charges are calculated based on the balance at the end or beginning of the billing cycle.

The adjusted balance method is a bit more complicated; it takes the balance at the beginning of the billing cycle and reduces the payments you make during the cycle.

The daily balance method summarizes your finance costs for each day of the month. To do this calculation yourself, you need to know the exact balance of your credit card each day of the billing cycle. Then, multiply the daily balance by the daily rate (APR/365). Add daily finance charges to get monthly finance charges.

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, then finance costs are calculated from the average. To do the calculations yourself, you need to know your credit card balance at the end of each day. Add the balance each day, then divide by the number of days in the billing cycle. Then, multiply that number by the APR and the day in the billing cycle. Divide the result by 365.

READ ALSO:   A Beginner's Guide to Investing in Real Estate

You may not be charged a finance fee if you have a 0% interest rate promotion or if you have paid the balance before the grace period.

Frequently Asked Questions (FAQ)

What is the unpaid balance method?

The unpaid balance method is a way to calculate finance costs, but it is used less frequently than the average daily balance method. With this option, your finance charge is based on your unpaid balance. You calculate the interest on the unpaid balance and add it to the total unpaid balance. Add new purchases and subtract any payments and credits.

What is the grace period?

The grace period for a credit card is the period between when your billing cycle ends and your payment is due. You may be able to avoid paying interest on purchases if you pay your balance in full by the payment due date. Advances usually have no grace period, and interest starts accumulating from the date of cash withdrawal.

Share your love