How is Your Credit Card Balance Calculated to Figure Out the Finance Charge?

by Mack Bartlett

COMPLETE

You get your credit card bill every month, review it, and see that the interest has changed, yet again. You wonder how on earth they ever decide how the interest rates are figured into your expenses. Is it all a scandal or do they really havea formula for this type of thing?

Believe it or not, they do have some rhyme and reason for the differing amount of interest they charge you each month. It is based on the type of balance that is being figured. Here are a few of the types of balances that are important factors when it comes to calculating the finance charges that are charged by the credit card company you are with.

Average Daily Balance

First, your credit card company takes all the money you spent in one day and averages it out. After that, they average all the days of the month together so that they have the average daily balance for that certain month. Once they have that, it is multiplied by one twelfth of your APR. That is one method of coming up with the finance charges on your credit card balance.

Previous Balance

Some credit card companies will charge you more interest based on how much of a balance you carry over from month to month, rather than paying off your credit card debt completely. The beginning balance and the ending balance are both shown on your bill, and you will see how much you have left that you did not pay last month, or the last time you were billed. This amount of money from the previous month and the amount that billed to you this month combined will be what determines your finance charges for this specific month.

Daily Balance

The company will take the amount that you spent each day within the specified month and, rather than multiplying it by one twelfth of the APR, which fraction represents the months in the year, they multiply it by 1/365th of the APR. This, of course, represents each day in a full year. This method is based on how much you actually spend in a day, and therefore is more precise because it has more detail than an average daily balance, which only takes into account the possible average amount spent in a month.

Two Cycle Balance

This type of calculation of your finance charges is basically the same thing as your average daily balance, but instead of involving one month, it takes into account the last two months or billing periods. This can be difficult to handle if you carry a balance over each time. The interest rates build up and climb with each billing period.

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