How Credit Card Finance Charges are Calculated?

The finance charge is the dollar amount you pay to use credit. The amount depends in part on your outstanding balance and the APR.

Credit card companies use one of several methods to calculate the outstanding balance. The method can make a big difference in the finance charge you’ll pay. Your outstanding balance may be calculated

• Over one billing cycle or two,
• Using the adjusted balance, the average daily balance, or the previous balance
• Including or excluding new purchases in the balance.

Depending on the balance you carry and the timing of your purchases and payments, you’ll usually have a lower finance charge with one-cycle billing and either

• The average daily balance method excluding new purchases,
• The adjusted balance method, or
• The previous balance method.

Minimum finance charge

Some credit cards have a minimum finance charge. You’ll be charged that minimum even if the calculated amount of your finance charge is less. For example, your finance charge may be calculated to be 35¢--but if the company’s minimum finance charge is $1.00, you’ll pay $1.00. A minimum finance charge usually applies only when you must pay a finance charge--that is, when you carry over a balance from one billing cycle to the next.