Finanace Charges
Different Methods to Calculate Finance Charges
Different creditors use different ways to calculate the fees they charge you. Here’s a brief list of the most popular ways:
| Average Daily Balance | With these types of credit card accounts, your account is immediately credited with the payment you make on the day your payment is received. On each day of the billing period, your balance is computed anew. Any credits or refunds made to your account during that day are subtracted. Sometimes the creditor will also add any new purchases you made on that day. Each daily balance in the billing period is added up then divided by the number of days in the billing period to get the Average Daily Balance. |
| Adjusted Balance | This way of calculating fees is the best for you, the Consumer. This is calculated by using the balance of the previous billing period as a base for current calculations. Specifically, payments and credits received by the creditor during the current billing period are subtracted from the balance of the previous billing period. Only the payments and credits you have are calculated – not the purchases. Any purchases you make are not included in the calculation until the end of the billing period. This allows you to pay down some or all of your current purchases before they incur interest. |
| Previous Balance | This is the amount of money you owed at the end of the previous billing cycle. None of the payments, credits and purchases made during the current billing period is included in this method. |
| Two Cycle Balances | This method of calculating interest is the harshest for you. It involves calculating the average daily balance from two billing cycles instead of just one. The practical impact of this is that the grace period is basically eliminated for those who carry a balance. If the total amount due is not paid in full at the time of the first billing cycle, then the amount of interest is calculated retroactively from the date of purchase. To make matters worse, credit cards which use this method usually have higher interest rates. |
Now What??
OK, so your creditor uses one of the above methods to decide what your balance is for the billing period. But then what do they do?
They take that balance and compute your fees. How? Like this:
If they use the Average Daily Balance method:
|
|
What is the daily periodic rate, you ask?
It’s calculated by your applicable APR (Annual Percentage Rate) divided by 365. Note that the APR for purchases and for cash advances is usually different.
If they use the Two Cycle Balance method.
- then you are charged the sum of the average daily balance for the previous month plus the average daily
balance for the current billing cycle
If they use the Adjusted Balance or Previous Balance method:
- then the balance of purchases and/or cash advances is multiplied by the monthly periodic rate to get the finance charge for that month.
- If you want to know what the monthly periodic rate is. It is the applicable APR divided by 12.
PAY PAY PAY
Now that you see how these finance charges are calculated, you should also be seeing how easy it is for you to lose your hard earned money. Every month these finance charges get tacked on to your balance. If you just pay the minimum balances required, these finance charges will increase dramatically. Before you realize it, your original, reasonable balance becomes highly unreasonable and unmanageable.
The best thing to do is pay pay pay.
Pay as much as you can.
Pay as often as you can.
Pay so that you can put an end to these finance charges as quickly as possible.
This is a secure website - your information will be encrypted. Click on the image below for more security information.
