As more and more credit card users today, it is important to know what is actually being paid for a finance charge. How to calculate the finance charge is different for each bank. The company must disclose the method of calculation and the interest rate charged to customers. This article can help calculate the finance charge on your credit card.
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Method 1 of 2: Understanding Finance Charges
Step 1. Know the meaning of finance charge
The term credit card often confuses its users. Thus, it is important to know the meaning of a finance charge and its impact on you.
- Finance charge is a source of profit for banks for lending money through credit cards from customers. Basically, a finance charge is the cost of using your credit card. Finance charges usually charge a flat rate, as opposed to a mortgage or car loan whose interest rate depends on the debtor's credit score.
- Finance charge is the total cost of borrowing, including interest, commissions, and other fees paid by the debtor.
- By knowing your credit card finance charges, you can better budget and determine how much money you actually save on your credit card.
Step 2. Find the calculation method the bank uses
Most banks calculate finance charges by one of two methods: a one-cycle finance charge including purchases, or a one-cycle finance charge without purchases. Different methods, different calculations. The name of the finance charge calculation method should appear on your monthly credit report. Identify the calculation method before calculating your score.
Step 3. Gather relevant information
Step 1. Calculate the average daily balance including your new purchases
This is the most common method used by banks to calculate finance charges. This method is also the most expensive, as new purchases and balances are accounted for immediately without a grace period to prevent interest from being held up. Some banks impose a grace period between the date of purchase and the date of collection so that if the bill is paid in full on time, no interest will be charged.
- Add outstanding balance on each day of your billing period. Include all new purchases that come into this balance. For example, if your balance is IDR 180,000 for 10 days, then you earn IDR 1,800,000. Then, for example, your balance is IDR 110,000 for 5 days. So, you get IDR 550,000. Then, for 15 days your balance is IDR 90,000. So, you get Rp1,350,000. When you get a range of numbers over the full billing cycle, add up all the numbers. For example, IDR 1,800,000 plus IDR 550,000 plus IDR 1,350,000 gets a total of IDR 3,700,000.
- Divide this number by the total number of days in the billing cycle. Most billing cycles consist of 30-31 days. The result of the division is the daily average balance that will be used to calculate the interest payable. From the previous example, the average daily balance is 3,700,000/30 which is approximately Rp. 124,000. Finance charge is the Annual Percentage Rate (APR) adjusted for the number of billing cycles in a year times the average daily balance. For example, if the APR is 18% with 12 billing cycles, the monthly rate is 1.55. Thus, the finance charge is 1.5% times the average daily balance.
Step 2. Calculate the average daily balance without new purchases
Sometimes, new purchases are not taken into account when adding to your outstanding balance.
- Add the outstanding balance on each day of your billing period. The calculations are basically the same as before, except that new purchases are not taken into account.
- Again, divide this number by the number of days in the billing cycle. The result is your average daily balance. Finance charge is the adjusted APR for the number of billings in a year times the average daily balance.
- It should be noted that different APRs can be used for various transactions such as transfers or cash advances. In addition, the APR rate may expire after a certain period.
Step 3. Understand the implications of each method
These two methods, while similar, differ greatly in their impact on credit card users.
- If you use a credit card for purchases, such as gas and food, look for a credit card that doesn't include new purchases in its daily balance. Thus, there is less grace period between billing cycles each month.
- In general, it's best to avoid credit cards that include new purchases in your daily balance. Depending on the bank, there may not be a grace period, and finance charges can increase quickly. If you use a credit card only to transfer balances and not to buy things, you will not be greatly affected. It should be noted that the balance on which interest is calculated varies including ending balance, previous balance, and so on.
