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How Credit Card Finance Charges are Calculated

The finance charge for your credit cards is usually determined by the amount of your outstanding balance on your card account and the current APR (Annual Percentage Rate) you are being charged. Card issuers tend to use one of three ways to determine your charges. The outcome of theses various formulas is not the same; so it pays to know the differences literally. 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 using the adjusted balance, previous balance (sometimes referred to as two-cycle), or the average daily balance as the reference point. Check your card agreements terms if new purchases and/or cash advances are also included or excluded as this varies from provider to provider.

The average daily balance is the most common calculation method for interest and or finance charge rates. Everyday in the billing period, your balance is updated with any credits or refunds. With some credit card issuers, any new purchases are also added. When the end of the billing cycle comes around, daily balances are added and divided by the number of days in the billing cycle to arrive at the "average daily balance."

The adjusted balance method is the most beneficial method for cardholders. Credits received during the current billing cycle are deducted from the balance at the end of the previous billing cycle. Purchases and/or cash advances made during the billing cycle are not reflected in the total. Basically, if you pay your bill before the end of the billing cycle you don't get stuck with finance charges.

With the previous or two-cycle balance method, the average daily balance is figured from two billing cycles rather than a single one. As a consequence, this increases the finance charges one must pay normally. There usually is no grace period included with this method and if the bill is not paid in full the interest may be made retroactive back to the original purchase date.

It is also important to note that many credit cards also carry a minimum finance charge. Regardless if your calculated finance charge is lower, you will still be required to pay this charge. However, if no purchases or cash advances have been made during the duration of the billing cycle, generally you will not be assessed and charges. Nevertheless it is generally wiser to check the particular card in question's terms of service and fee schedule.

About the Author:

Sam Donaldson is the staff writer for www.credit-cards-with-rewards.com/ . Discover various types of business, gas, and airline rewards credit cards.

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