How is a credit card finance charge calculated?
Credit card finance charges can be calculated in several ways, depending on your credit card issuer. That said, most credit card issuers will use the average daily balance method to calculate the card’s annual percentage rate (APR), which is the credit card’s finance charge.
This method charges the daily interest rate (which is the APR divided by 365) based on the average daily balance on the credit card (the sum of your daily balances divided by the number of days in your billing cycle).
Keep in mind that credit card issuers may also use compounding interest, which calculates finance charges based on your balance plus the interest from the previous day.
When do finance charges apply?
There are several situations when you may pay finance charges on a credit card, including:
- Not paying the full statement balance by the statement due date
- Missing a payment due date
- Taking out a cash advance
- Getting a balance transfer without a promotional rate
Your credit card agreement will outline your card’s terms and conditions, fees and charges.
How to minimize finance charges
The key to minimizing finance charges is understanding how your credit card APRs and billing cycles work.
At a high level, your billing cycle generally lasts 28 to 31 days, and your statement is based on your credit card activity during that time. Purchases typically incur a certain APR when you carry a balance. However, you may have a grace period — which lasts from the end of your billing cycle to your payment due date — during which time you wouldn’t have to pay interest. This only applies if you pay off the credit card balance by your due date, so prioritizing that can help you save.
If you do carry a balance, paying it off as soon as possible can also help you save on credit card finance charges, compared to paying the minimum amount due.
Finally, your credit card can have other, higher APRs that apply in certain situations. It’s important to understand when those apply and how much they cost. For example, cash advances typically have a higher APR, compared to the purchase APR. Alternative options, such as a lower-rate personal loan, may make more financial sense if you need money.
Similarly, missing credit card payments may mean paying a higher penalty APR. Signing up for autopay can help you avoid those costs. And if you opt for a balance transfer, looking for low intro APR cards is generally preferable.
Credit card finance charges can be expensive, especially if you carry a high balance. With careful planning, however, you can start managing these costs and make your credit cards work for you.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
