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Credit Card Finance Charge

While the issuers of some credit cards require you to pay off all of your charges at the end of each month and get in return the benefit of the lack of finance charge (in some cases no maximum limit too), most credit card companies provide revolving credit.

The interest you are charged on the revolving credit is known as finance charge. In addition to that, you will be required to make a minimum payment, which is usually set at specific percentage of the current balance or $10.

How is Finance Charge Calculated?

Finance charges can be estimated in a number of ways.

  1. Average Daily Balance

    This method of calculating a finance charge is the most commonly used one. Under it the charges are added and the payments subtracted as they occur by the company issuing the credit on daily basis. In order to find the finance charge, the average of the daily totals is found at the end of the pre-determined time period and then multiplied by the monthly interest rate.

  2. Adjusted Balance

    In order to calculate the finance charge using this method, apply the following formula:

    Finance Charge = (Balance from Past Statement + New Charges - Executed Payment) x Monthly Interest Rate

  3. Previous Balance

    In order to calculate finance charge using this method, apply the following formula:

    Finance Charge = Past Statement Balance x Monthly Interest Rate

    This method is believed to be in favor of the credit issuer because after you have paid down your balance you are still charged interest for the whole period.

In addition to the regular finance charges, recently the credit card field saw the introduction of late fees and over-the-limit fees. These fees are widely used by most credit card issuers. If a predetermined number of late payments have occurred, credit issuers tend to increase interest rates. Additionally, if you accumulate a number of late payments the issuer may start to apply the inflated interest rate until the account matures and is closed. Late payments may have a negative impact on your credit rating, so you should be careful and try to avoid them.

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