If you carry a balance on your credit card from month to month, you have most likely noticed the finance charges that build up and add to your balance as well. But, do you know how these finance charges are computed? And, did you know there are several different methods that can be used by your credit card company, with some being more costly to you than others?
Average Daily Balance
After your average daily balance is figured, it is multiplied by approximately 1/12 of whatever your annual percentage rate, or APR, is in order to determine your finance charges for that billing cycle. Depending on your credit card and whether or not you have a grace period, these interest rates may be determined on a daily basis on a monthly basis.
Daily Balance
With the daily balance method, your credit card company determines how much debt you actually carried on the card from day to day. Then, this figure is multiplied by 1/365 for the number of days in the year. The result is your finance charges for that billing cycle.
Two-Cycle Balance
The two-cycle balance method is similar to the average daily balance method, except the average daily balance is determined by using the current billing month and the one that preceded it. This method will cause you to pay interest rates from the previous month if you fail to pay the balance in full in one billing cycle.
Previous Balance
With the previous balance method, you will see a beginning balance and an ending balance on your credit card statement each month. Your finance charges will be determined based on the outstanding balance from the previous bill.
Be sure to ask a representative of the credit card company to explain when and how finance charges are calculated with your credit card. Then, select the one that fits best with your lifestyle and spending habits.
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{ 2 comments… read them below or add one }
If I borrow $ 20,000 at 2.99% interest, who much interest will I pay in the one year?
If you don't pay down the balance at all during the year, the total interest charges for the full year would be $598. Hopefully, you will be paying down the balance in increments over the life of the "loan" or balance transfer so the interest charges incurred would be less than that.