Finance Charge Calculator – How can you find out how much your credit cards are charging?

Finance Charge Calculator – How can you find out how much your credit cards are charging online? That will be the topic of today’s article.

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Introduction

Whenever you have a credit card balance after the grace period (if you have one), you will be charged interest in the form of finance charges. Fortunately, your credit card statement will always show your financial commission when you charge it, so there is no need to calculate it yourself. 

But knowing how to calculate yourself can come in handy if you want to know what finance charges to expect on a particular credit card balance or if you want to make sure your finance charges have been billed correctly.

To begin our guide, let’s first become acquainted with some main terms and definitions that we’ll often use below. 

Credit Card Interest Calculator Terms and Definitions

Understanding the various terms and conditions of a credit card and how interest is charged is an important step towards becoming an educated consumer and using your credit card more efficiently.

Balance Due – The total outstanding balance you owe, including interest.

Annual Percentage Rate (APR) – Also known as the Annual Percentage Rate, it applies to credit card purchases that have not been paid in full each month.

Annual Fee – The amount you pay each year to your credit card company to service your credit card.

Average Daily Balance – The base amount used to calculate credit card interest.

Finance fees – the interest charged on borrowed money.

Monthly payment – the amount of money credited to the balance on a monthly basis.

Grace period – the period during which you will not pay interest on the credit card balance, even if it is overdue.

Minimum Payment – The minimum amount you must pay each month to maintain a good credit card account reputation.

Cash advance is a service that allows cardholders to withdraw a specified amount of cash from an ATM, bank or other financial institution.

Interest is the amount paid for borrowing money.

Principal is the initial amount borrowed, excluding interest. Keep in mind that when interest is compounded, the interest is absorbed into the principal.

What is a general finance charge?

The financing fee is the total amount of money a consumer pays for a loan. In other words, the financial commission is the total dollar amount you pay to use a particular loan. 

Therefore, we can formulate the definition of finance charges as the amount paid in excess of the loan amount. It includes not only the interest charged to your account, but all commissions associated with your loan. 

Thus, financing costs represent the cost of borrowing. Financial fees are usually associated with any form of loan, be it a credit card, personal loan, or mortgage.

This could be a car loan, credit card, or mortgage. Common finance charges include interest rates, clearance fees, service charges, late fees, and so on. 

The total finance fees are usually credit card related and consist of the outstanding balance and other fees that are charged when you leave the credit card balance after the due date.

Most often, consumers get a loan using credit cards. If you do not redeem your balance in full, your issuer will charge interest on the outstanding balance. These interest costs are finance costs. 

If you miss a due date beyond the grace period without paying the required minimum credit card payment, you may be charged a late payment fee, which is another example of finance charges. 

How to count funding fees? Six ways to calculate financial costs

Credit card issuers can use one of six different methods to calculate finance charges.

• Average Daily Balance: This is the most common method based on the average amount of your daily debt in the billing cycle.
• Daily Balance: The credit card issuer calculates finance charges for each day of the balance at the daily interest rate.
• Adjusted Balance: Subtracts your monthly payment from your starting balance. Since purchases are not included in the balance sheet, this method yields the lowest finance costs.
• Dual Billing Cycle: The average daily balance of the current and previous billing cycles is applied. This is the most expensive method of adding funds. The Credit Card Act of 2009 prohibits this practice in the United States.
• Ending Balance: Finance charges are based on your balance at the end of the current billing cycle.
• Previous balance: The final balance of the last billing cycle is used in calculations. Try to avoid credit card issuers that use this method as it has the highest financial costs of any still in use.

Also take into account, that you can apply the recurring finance charge calculator for most of the above methods (except for the daily balance methods) – you only need to be careful when determining the balance you owe at the beginning of the calculation.

How general finance charge works?

At the end of each billing cycle on your credit card, if you do not pay the entire balance of your statement from the previous billing cycle, you will be charged interest on the unpaid balance, as well as any late fees if incurred. Credit card financing fees depend on your interest rate for the types of transactions for which you have a balance. 

These include purchases, balance transfers, and cash advances, each of which may have different interest rates and therefore a different amount of your debt for each of these categories. The total of your finance costs is added to all purchases you make – and the total, plus any commissions, makes up your monthly credit card bill.

Credit card companies calculate financial costs in different ways, which can be confusing for many consumers. A common method is the average daily balance method, which is calculated as (average daily balance × annual interest rate × number of days in a billing cycle) ÷ 365.

To calculate your average daily balance, you need to look at your credit card statement and find out what your balance was at the end of each day. (If your credit card statement does not show your account balance at the end of each day, you will also need to calculate these amounts.) Add these numbers, and then divide by the number of days in your billing cycle.

The hardest part is figuring out what your average daily balance was during your billing cycle.

How to calculate finance charges for a credit card balance?

How to calculate finance charges for credit card balance. You can easily calculate the amount of your next credit card bill. To calculate the approximate amount of your next bill, you only need to know some key information on your statement and the calculator.

Check your current account balance at the end of the last billing cycle. Determine the interest rate (not annual interest) on your credit card.

Find out if your interest is calculated for 360 days a year or 365, and how long is the billing cycle for your card. This information is usually printed on the back of your credit card statement. If you’re unsure, use 365 days a year and 30 days in a billing cycle.

Divide the interest rate by 365 or 360, whichever works for your card. The resulting number is the daily interest rate you pay.

Take the daily interest rate and multiply it by the number of days between payment cycles. The answer is the periodic interest rate.

Multiply the balance that you owe at the end of the last billing cycle by the periodic interest rate that you determined in step 4. This is the financial charge for the credit card balance for the next cycle.

Calculate if your credit card financial commission is based on your average daily balance. If the credit charge is based on your average daily balance, follow steps 1 through 3.

Add up the amount due for each day of the previous billing period. Divide this answer by the number of days in the billing period to get the approximate amount of your next invoice. 

How to minimize financial expenses on a credit card?

The easiest way to reduce your financing costs is to avoid charging interest on your balance sheet. To do this, you need to pay off the outstanding credit balance in full by the due date so that you are not charged interest.

Credit card issuers offer a so-called grace period, a set number of days that no interest is charged, often 44 to 55 days. During this interval, you have time to repay the loan interest-free during the grace period. 

It is still recommended to repay the loan in a given billing cycle: any balance carried over to the next billing cycle means that you will lose the grace period privilege. You can only return it if you pay the balance in full within two consecutive months.

Also keep in mind that, as a rule, the grace period does not apply to cash advances. In other words, there are no interest-free days and service charges may apply. Interest on cash advances is charged immediately from the day the money is withdrawn.

Thus, the best way to minimize your financial expenses is to avoid cash advances and pay your credit card bills in full each month. 

How to calculate your monthly credit card funding fee?

If you only pay the minimum monthly payments on your credit cards, most of that payment goes straight to finance charges and very little goes to your main card balance. 

Learn how to calculate your monthly credit card finance charges so you know exactly how much of your payment goes to your main balance and how much to finance charges. This information can also help you figure out how much more you can pay to your card balance to pay off the debt early.

Read the credit card agreement. You need to know your annual interest rate in order to calculate your monthly credit card financing costs. The annual interest rate is stated in the credit card agreement.

Divide the annual interest rate by the number of billing periods. Since this is the annual interest rate and you want to receive monthly payments, you divide your annual interest by 12. These are your monthly finance charges.

Change your APR to decimal. For example, if your annual interest rate is 10 percent, you change 10 to 0.10. Then divide 0.10 by 12 to get your monthly finance charge of 0.0083.

Get your average daily balance. You base your monthly finance charges on this balance sheet. You can get the amount from your last credit card bill.

Multiply your average daily balance by the number calculated in step 2. For example, if your average daily balance is $ 1,500 at a 10 percent annual rate, your monthly finance expense would be $ 1,500 x 0.0083 = $ 12.45.

How to calculate finance costs on a daily basis?

Lending credit to your customers can boost sales by attracting more potential buyers, but selling on credit also means waiting for your money. Estimating finance charges – another term for interest – on the outstanding balance of customers, encourages them to pay on time. These costs are easy to calculate on a daily basis.

Before you can calculate finance costs, you need to choose an interest rate. Rates are shown on an annualized basis. Most states have laws that set the maximum interest rate that a merchant can charge consumers. 

In Colorado, for example, you can’t borrow more than 12 percent a year. In Massachusetts, 20 percent. In Minnesota, it’s 8 percent. Other states peg their highs to a specific market rate, for example, 5 points above the federal funds rate. 

Charging more than the statutory rate is a crime called usury. Check your state’s usury laws when setting your rate.

Your next step is to decide how much of your client’s balance will be charged with finance fees. Sellers generally provide an interest-free grace period after purchase. 

For example, if you have a 30-day grace period and a customer buys something on credit on August 20, that customer will not start paying finance charges for that purchase until September 19, the 31st day after the sale. 

If you are using a grace period, try to estimate finance costs only for that part of the balance sheet that is outside the grace period.

Since you will be charging interest on a daily basis, you need to convert the annual interest rate to daily. You do this by dividing the annual rate by 365. Let’s say you charge 12 percent per year. In decimal, that’s 0.12. 

Divide by 365 and the daily rate is roughly 0.000329. To calculate daily finance costs, multiply your client’s balance on that day by the daily rate. For example, a customer with a balance of $ 1,500 would pay about 49 cents a day.

Finance charges are usually “compound”, which means interest is added to the account balance, so the next time you estimate finance charges, you charge interest on the previous interest. 

While you are looking at your daily finance costs, you are not necessarily increasing them on a daily basis. You can only add once a month. In the previous example, if you accrued compound interest on a daily basis, the balance for the next day would be $ 1,500.49 and you would charge the daily rate on that amount. However, if you accrued compound interest on a monthly basis, you would charge a daily rate of $ 1,500 each day, and then at the end of the month, you would add the accumulated finance charges – just under $ 15 – to the balance. Truth be told, no matter if you charge daily or monthly charges, the difference in total percentage is only small, unless you are dealing with six-figure accounts.

Here is another example

Let’s discuss a more simplified example, let’s say your daily balances in a five-day billing cycle were as follows, and all your transactions were purchases:

Day 1: $ 500

Day 2: $ 550

Day 3: $ 670

Day 4: $ 510

Day 5: $ 580

Total: $ 2,810

Divide that amount by 5 to get an average daily balance of $ 562

The next step in calculating your total finance cost is to check your credit card statement for interest rates on purchases. Let’s say your purchase has an annual percentage rate of 19.99%, which we’ll round up to 20% (or 0.20) for simplicity. Now you have all the necessary data for the calculation.

($ 562 x 0.20 x 5) ÷ 365 = $ 1.5 = Total Finance Cost

Your total financial cost of borrowing an average of $ 562 for 5 days is $ 1.5. It doesn’t sound too bad, but if you had the same balance all year long, you would pay about $ 110 in interest (20% of $ 1,095). Borrowing a small amount of money is expensive.

On a credit card statement, the total finance charge can be listed as “interest payments” or “finance charges.” Average daily balance is just one of the calculation methods used. There are others, such as adjusted balance, daily balance, double balance of payments, final balance and previous balance. You can avoid high financial costs by knowing which method is being used and by paying your credit card bill in a way that minimizes or eliminates those costs. 

How to avoid credit card interest?

Smart consumers don’t spend their money on credit card interest and use a variety of strategies to minimize costs.

The ideal strategy is to pay the invoice in full before the due date so as not to receive the accrued interest. But if you withdraw cash from an ATM using a credit card or pay less than the full amount shown on your statement, you will incur financial costs.

Credit card companies offer a certain number of interest-free days (often 44 to 55 days) as a grace period to give you time to pay your bill without interest. However, once you allow the balance to be carried over to a different billing cycle, you will lose your grace period privilege and must return it by paying your balance in full for two consecutive months.

Cash advances are usually excluded from the grace period rule. In other words, there are no interest-free days for cash advances, and there is usually a service charge as well. Interest on cash advances is charged immediately from the day the money is withdrawn.

The best strategy is to avoid cash advances and pay your credit card bills in full every month.

Remember, credit cards are handy tools that can be used to your advantage, but you have to be careful not to get into debt. Buy only what you can afford to pay for right away.

Already in debt? Do not worry. Calculate credit card interest and due dates by running some scenarios with our credit card interest calculator. Realize how expensive it is to stay in debt, make a repayment plan and get out of debt!

Further Reading

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