Finance Charge Calculator

A finance charge calculator can save you time when computing your monthly finance charges. It’s a good idea though to have an insight into how finance charges are calculated. I’ll be providing you with this knowledge. After you have the basics, avoid this tedious calculation with the exceptional credit card finance charge calculator I have located for you.

Let me first explain the definitions of terms used in finance charge calculation.

Average Daily Balance (Balance Subject to Finance Charge) – An average daily balance equals the sum of your credit card balance each day in the billing cycle divided by the number of days in that billing cycle. Your daily balance may include new purchases and any payments or credits, depending on the bank. See the calendar below, the balance increases because of purchases (I’ve chosen to include these in this example). No payments and credits were made during this billing cycle.

Monthly Periodic Rate – The monthly periodic rate equates to your annual percentage rate divided by the number of months in a year. Creditors may use the monthly periodic rate in an average daily balance (monthly compounding) finance charge calculation. See the example below to understand this calculation.

Example: Annual Percentage Rate = 15.9%
so 15.9% divided by 12 = 1.325% (or .01325)

Daily Periodic Rate – The daily periodic rate equates to your annual percentage rate divided by the number of days in the year. A non leap year is 365 days and a leap year is 366 days. Creditors may use the daily periodic rate in an average daily balance (daily compounding) finance charge calculation. Refer to the example below to calculate your daily periodic rate.

Example: Annual Percentage Rate = 15.9%
so a non leap year – 15.9% divided by 365 = .0436% (or .000436)
and a leap year – 15.9% divided by 366 = .0434% (or .000434)

Average Daily Balance Monthly Compounding – A method of finance charge calculation where finance charges are based on your average daily balance multiplied by the monthly periodic rate. This method of finance charge calculation is used still by a few credit card issuers. The example below shows you how to calculate this type of finance charge based on the average daily balance in the above calendar.

Example:
Average Daily Balance=$280.33 Monthly Periodic Rate=1.325% (or .01325)
so $280.33 X .01325 = $3.71 in Finance Charges

Average Daily Balance Daily Compounding – A method of finance charge calculation where finance charges are added to the credit card balance each day. Therefore charging you not only finance charges on your balance, but also finance charges on the accrued finance charge from previous days. Most credit card companies today use this method to compute their finance charges. The example below shows the first two days. See how those finance charges add up daily?

Example: Balance=$100.00 Daily Periodic Rate=.0436% (or .000436)
so Day 1 – $100.00 X .000436 = $0.04 in Finance Charges
$0.04 + $100.00 = $100.04
and Day 2 – $100.04 X .000436 = $0.04 in Finance Charges
$0.04 + $100.04 = $100.08

A majority of banks use the daily compounding method for calculating their finance charges. For you, the consumer, it may cost a few pennies a month difference. See the final example below and compare the daily compounding finance charge calculation with the monthly compounding finance charge calculation above. You will see the monthly compounding finance charge totals $3.71 while the daily compounding finance charge is only $3.67. Big difference! 🙂

Confused yet? Calculating finance charges can be complicated! I’ve described the most used methods here. To save you time, try this finance charge calculator. It seems to work well and will give you a very rough estimate of your monthly finance charge. Keep in mind, this finance charge calculator does not take into consideration new purchases and credits. My best tip for using this calculator is to use your highest balance during the billing cycle. This will make you happy in the end when you see less on your credit card bill than you calculated with this finance charge calculator. Good luck using this finance charge calculator!

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