How Do You Calculate Finance Charges?


Quick Answer

According to Bankrate, there are four different methods used to calculate finance charges for credit cards, all of which are dependant on the specific type of balance a person carries. The different types of balances include previous, two-cycle, daily and average daily.

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How Do You Calculate Finance Charges?
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Full Answer

In order to calculate the finance charge for a previous balance, a credit card company goes by the balance owed at the beginning of a full billing cycle. The two-day cycle finance charge is determined by any debt that is already paid on the account. For example, if the account begins with a zero balance, and a person charges $300 to it but pays $250 by the due date, the person is going to have a finance charge on the original $300 as long as it's double-cycle billing.

With the daily balance finance charge, the balance carried every day of the billing cycle is multiplied by a tiny fraction of the account's annual percentage rate before it's all added together. For the final balance the daily average balance is multiplied by about one-twelfth of the annual percentage rate in order to determine the finance charge.

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