Do you know how to calculate your own finance charge? Credit issuers have different ways of calculating finance charges. You can find out which method your credit card issuer uses by reading your credit card agreement, reading the back of your credit card billing statement, or by calling your credit card issuer.
You can calculate your own 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. If you will like to calculate your own finance charge so as to figure out what your finance charge should be. Keep reading below.
Calculating Your Own Finance Charges The Simple Way
The simplest way to calculate your own finance charge is to multiply the balance by monthly rate:
balance X monthly rate
For this example, we’ll say 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. First, calculate the periodic rate by dividing the APR by the number of billing cycles in the year, which is 12 in our example. Remember to convert percentages to a decimal. The periodic rate is:
.18 / 12 = 0.015 or 1.5%
The monthly finance charge is:
500 X .015 = $7.50
Calculating Shorter Billing Cycles
With most credit cards, the billing cycle is shorter than a month, for example, 23 or 25 days. If the number of days in your billing cycle is shorter than one month, calculate your finance charge with this formula:
balance X APR X days in billing cycle / 365
Example: If your billing cycle is 25 days long, the finance charge for that billing period would be:
500 x .018 X 25 / 365 = $6.16
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. Read the back of your credit card statement to figure out which method your credit card issuer uses.
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 your finance charges 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 charges to get the 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 and then the finance charges 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.
Note that you may not have a finance charge if you have a 0% interest rate promotion or if you’ve paid the balance in full before the grace period.