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Credit Card Finance Charges Defined

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Credit Card Finance Charges Defined

If a consumer carries a balance on their credit card beyond a single billing cycle, they will be charged for it. This is called a finance charge and is associated with the APR on the consumer’s account. The amount charged will be affected by the card’s APR, how the card was used, and how much was charged. It is important to know that rates, even on Low Interest Credit Cards, vary according to how a credit card is used, so a new purchase will have a different APR than a cash advance or balance transfer. Credit cards can be a bit overwhelming, and the fees associated with them are understood by very few people who use them. This can be dangerous can lead some people into a debt spiral that can be very difficult to get out of. Although creditors should be clearer when presenting their services, it is the consumer’s responsibility to do the necessary research before entering in to any kind of financial agreement. One of the more confusing aspects of credit cards is how interest is calculated. The two most common methods of calculating credit card interest are: The Two Cycle Average The Average Daily Balance The Two Cycle Average: This is the most common method used to calculate credit card interest, and not surprisingly it is the most complicated. Interest is calculated by taking an average of the amount charged to an account by the number of days in the current and previous billing cycle. A good example would be if during the current billing cycle, the consumer has $500.00 carried over from the previous cycle, and the interest rate of the credit card in question is only 11%. For purposes of this example say the card holder only pays $100.00 on their account. If the two cycle average daily balance is used, the consumer must average the current balance, as well as the previous balance and take a daily average. One way to look at it is this: (Previous Balance + Current Balance) / Two Billing Cycles * 30 = (Amount Applied to Interest)* APR Using the above figures for our consumer, and assuming both billing cycles are 30 days in length, we get: ($1000.00 + $500.00) /60 *30 = $750.00. The consumer would be paying interest on $750.00 instead of the current balance of $500.00. This means a higher interest payment, and it is clear this method favors the creditor. Average Daily Balance: This method averages the amount charged for new purchases over the number of days in a particular billing cycle. An example would be if a consumer purchased a chair for $400.00, then the next week purchased a meal for %25.00. If no additional purchases were made during the current billing cycle, the average daily balance would be $14.17. This should mean that it doesn’t matter if you make a purchase on the first or last day of a billing cycle, the amount pain in interest is the same. The best way to maximize the value of any credit card is to not carry a balance, but of course this is not always possible. Only carry a balance when you must, and then only for as long as absolutely necessary. Credit Card Finance Charges Defined

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Last update date : 06-12-2021

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