Q:

How do you calculate finance charges?

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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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