How Do I Calculate Finance Charges? | 2024 Explicit Guide: Are you suspecting that you have been overcharged and you just want to know how to calculate your finance charges by yourself? It is a good thing for you to know how to calculate your finance charges so that you will not feel cheated.
Most people don’t know how to calculate their finance charges not because they don’t know how to do it, just because they have not been shown how to calculate it. And it is for the sake of knowing how to calculate your finance charges that this article is here today.
What that means is that in today’s article, we are going to focus on the necessary things you need to know and do, the basic processes, principles, and steps you have to follow for you to be able to calculate your finance charges very well. Meanwhile, before we go ahead, let us first know the meaning of finance charges.
About Finance Charges
What do finance charges mean? A finance charge is the cost that you have to pay for borrowing money or the cost of credits. It may be interest or any other cost as stated by the cardholder for any transaction. Usually, a finance charge is a gain to the lender and an expense to the borrower.
One thing you should know is that finance charges are never the same, they vary based on the method employed.
How Do I Calculate Finance Charges?
Are you worried about how you can calculate your finance charges, is it that you don’t know how to calculate them, or no one has given you the key on how to do it? Anyway whatever that is your reason, I assure you that calculating your finance charges is not a big deal if you follow the simple methods we are going to outline in this article today.
Average daily balance
The Average daily balance is the most common method. To calculate the Average daily balance, add each day’s balance and divide the total by the number of days in the billing cycle.
When you multiply the number by one-twelfth of your annual percentage rate or APR, the result will give you, your monthly finance charge. If your issuer uses this method, it makes it easier for you to pay your daily balance little by little and it will be beneficial to you.
Daily balance
This method is also similar to the Average, instead of calculating the average, every day, the balance is multiplied by 1/365th of your APR and the result will give you your daily finance charge.
Here, instead of calculator ng for the average, your issuer calculates your daily billing cycle.
Two-cycle billing
This method is known as the two-cycle billing or double billing cycle. In the two-cycle billing method, the current and previous billing cycles of the average daily balance are calculated.
This finance charge method is one of the most expensive and unfair methods because it can result in charging interest on balances that have been paid for already.
It was in 2009 that the Credit CARD Act of the double billing cycle method of calculating finance charges was introduced.
The adjusted balance
In the adjusted balance method, you have to subtract any payments you made during the billing cycle at the beginning of the billing cycle. You don’t have to include the purchase that was made in the balance.
Many credit card issuers don’t use this method, but amongst all the methods of calculating finance charges, this method is the lowest finance charge.
Ending Balance
In the ending balance method, your balance at the beginning of the billing cycle will be minus from the payments and the charges made during the billing cycle will be added, and whatever the result is that will become your balance at the end of the billing cycle.
The amount of the finance charge you have has nothing to do with the number of days in the billing cycle. So if your balance at the end of your billing cycle is on the high side automatically, it means that your finance charges under this method will also increase.
Read Also:
How to Borrow Money From Airtel in Nigeria (2023 Update)
Ways to Send Money to Nigeria from the US (2023 Update)
Previous Balance
In this method (previous balance) the balance that was used at the beginning of the billing cycle, is also the ending balance of the last billing cycle. The balance of your charge does not include payments or charges. The amount of the finance charge you have has nothing to do with the number of days in the billing cycle.
How to Calculate
Now let us see how you can calculate your finance charge using the finance calculator. For you to be able to calculate your finance charges, you have to understand the formula for it calculation, and you have to ensure that you are using the finance calculator.
The formula for Calculating Finance Charges
Finance Charge Formula = (add debt owed plus interest rate plus no. of days) / 365
Formular = balance X monthly rate
Example 1:
let us consider one example to illustrate how you can calculate your finance charges.
Let’s assume in November 2021, there was a bill of $350 and the last payment of the bill is 12th February 2022. So, the charge is levied after 12th February 2022 daily until one does not clear the dues.
Assuming the bill is not paid till 12th February 2022 and instead we pay it on 22nd February 2022, for ten days, the charge will be applied at a 20% interest rate
How do you calculate the finance charges for 10 days?
The calculation:
(350 + 0.20 + 10) / 365 = $ 1.92,
The final amount that the borrower will have to pay is $350 + $1.92 = $351.92.
Conclusion
I am sure that you now know how to calculate your finance charges if you have followed the simple methods we have outlined in this article for you. You can now see that calculating your finance charges is not as difficult as you used to think. Thank you for reading the article.