If you have a credit card, you may have wondered what the difference is between a finance charge and an interest charge. This is a common question among credit card users and the answer is different between credit card providers. It also depends on whether it’s calculated over a given term or during a billing cycle.
Our finance charge calculator allows you to calculate the finance charge on a loan. It helps you understand how much you will be paying in finance charges and determine whether you are getting a good deal on your loan. In addition to helping you find out the interest charge on your credit card, this calculator will assist you in estimating the charge on the outstanding balance of your credit card.
This article explains how to calculate the finance charge on credit card spending. It talks about the different types of charges and how much they are in different scenarios. We will also give you some tips on how to reduce finance charges on your credit cards. You will learn how to use a finance charge calculator and how to understand the results.
Important Facts about Finance Charges You Need to Know
Before you dive into computation, you need to know the basic things about finance charges. The following are the most common questions about finance charges and the answers. Read on to learn more!
What is the finance charge? It’s the total amount that is paid when taking out a loan or using credit. The amount that you pay beyond the amount you’ve borrowed is actually the finance charge. Aside from the accrued interest, it includes every fee associated with your credit. Thus, the cost of borrowing represents your finance charge.
Where can you find this data? The finance charge is usually attached to all forms of credit, including personal loans, mortgages, and credit cards. So, whether you have gotten a loan or obtained credit, you can easily find out how much your finance charge is.
How does it work? A credit card is the most common way of obtaining credit. That’s how the majority of customers get credit today. If the balance is not paid off altogether, then the interest will be charged (by the credit card issuer) on the outstanding amount. This is how finance charges work.
A late payment fee is another way to be charged. It happens when missing the due date. You will face a finance charge if you have not made the minimum credit card payment once your grace period has expired. Don’t miss deadlines!
6 Ways to Compute Your Finance Charge
As you can see, a finance charge is a fee that a lender charges for the use of money. This fee is often expressed as an annual percentage rate. Finance charges are typically imposed by credit card companies, banks, or other lenders in return for lending money to someone who has applied for a loan or other form of credit.
There are different ways to find out how much finance charges are. When calculating finance charges, credit card issuers use the following methods:
- Adjusted Balance
- Daily Balance
- Average Daily Balance
- Double Billing Cycle
- Previous Balance
- Ending Balance
The finance charge calculator on our website can be used for just about every method listed above. That makes it a versatile tool. All you need to do is enter the values (principal amount, rate, and time) in the appropriate fields. Use the method that works best for you!
Finance Charge Formula
Below is the formula you need to use when calculating a finance charge:
FC = Principal * Rate/12 * Time
If you want to compute a finance charge, you need to know how many days a billing cycle has unless you want to calculate it on an annual basis. In addition, you need to know the value of your yearly rate and the amount of principal. Alternatively, you can use the following finance charge formula:
Finance charge = Carried unpaid balance * Annual Percentage Rate / 365 * No. of Days in Billing Cycle
Let’s take an example for a better understanding.
Example
- Principal amount: $848.76
- Rate (yearly): 1.75%
- Time (months): 12
In our example, the finance charge is as follows: FC = 848.76 * 0.0175 / 12 * 12 = 14.8533. We recommend that you always use our calculator when calculating a finance charge. This simple tool will save you the hassle of computing it by hand and make sure the result is correct for the provided inputs.
Tips on How to Reduce Your Finance Charge
Once you have calculated a finance charge, you will need to find a way to minimize it as much as possible and go from there. There are a variety of methods to reduce finance charges. You should choose one that best suits your needs.
One of the simplest ways is to ensure that interest doesn’t accrue on your balance anymore. For this reason, the outstanding credit balance must be paid off completely prior to the deadline. This way you will not be charged for interest and it won’t accrue on your balance.
Chances are you have heard of the grace period? It is offered by many credit card issuers. This period comprises a certain number of days (usually somewhere between 45 and 55 days) when they do not charge interest. Take advantage of it!
Make sure your credit is paid during this period so as not to incur interest. This will help you reduce your finance charge. Be sure to pay off credit card debt throughout the billing cycle. Otherwise, you may lose your grace period privilege by carrying any balance into the next billing cycle. The good news is that it can be regained if the balance is paid altogether during 2 successive months.
It should be noted that cash advances are not covered by the grace period. This means interest-free days do not exist either. Plus, there might be a service fee too. Bear in mind that most issuers charge interest on a credit card cash advance right after withdrawing the funds – on the same day.
To sum up, if you want to lower finance charges, your best bet is to steer clear of cash advances. Additionally, you need to make sure every credit card bill is paid completely every month. As a result, your finance charge will be much lower or minimal.