What You Need to Know About Finance Charges

Those Tricksters
Finance charges are the way credit card issuers make money off of you. The tricky thing is that there are so many methods for calculating how much money you owe. Some methods can save you money and others can have you left with an empty wallet.

For simplicity’s sake, finance charges can be viewed as being the same thing as your interest, since many credit cards these days are cutting back on the amount of fixed fees. Finance charges are the cost of using credit, which in actuality includes both interest and fees.

Since there are so many ways credit card issuers can calculate you finance charge, we well explain some of the basic ones here, ranging from methods that experts say can save you money to others that will have you paying more then you should.

Easy on your pocket. Adjustable balance is the most common sense method for calculating finance charges and is what experts consider the method for saving you money. To calculate the finance charge, credit issuers take the balance from the previous statement, add the new charges and fee, subtract the payment that you make, and then multiply that number by your interest rate for that period.

Fair deal. Average daily balance is the most common method for calculating you finance charge. It is also considered the most fair for both the cardholder and credit card issuer. This works by adding up your balance for every day in your payment period, dividing that number by the amount of days in the period, and then multiplying that average by your interest rate for that period.

Someone find me a cardboard box. Previous balance, by experts is considered not favoring you, but favoring the credit card issuers. To calculate finance charge, credit card issuers take your previous balance and multiply it by your periodic interest rate. This causes you to pay interest on a balance that you may have already paid off.

Finance charges are tricky because of the amount of ways that credit card issuers can calculate it. So, remember to always check your cardholder agreement to find out how your credit card finance charges are being calculated. It is important that you find the one that is best for you.