Definition of total financial charges

What is the total finance charge?

Finance charges are the total amount of money a consumer pays to borrow money. This can include credit on a car loan, credit card, or mortgage. Ongoing finance charges include interest rates, set-up charges, service charges, late fees, etc. The total finance charge is typically associated with credit cards and includes the outstanding balance and other charges that apply when you carry a balance on your credit card after the due date.

How total finance charges work

At the end of each billing cycle on your credit card, if you do not pay the balance of the statement from the previous billing cycle in full, you will be charged interest on the unpaid balance, as well as late fees if it is. been engaged. Your finance charges on a credit card are based on your interest rate for the types of transactions you have a balance on. These include purchases, balance transfers, and cash advances, each of which may have a different interest rate, and therefore a different amount you owe in each of these categories. Your total finance charges are added to all the purchases you make, and the grand total, plus any charges, is your monthly credit card bill.

Credit card companies calculate finance charges in a number of ways that many consumers can find confusing. A common method is the average daily balance method, which is calculated as follows (average daily balance × annual percentage rate × number of days in the bill cycle) ÷ 365.

To calculate your average daily balance, you need to look at your credit card statement and see what your balance was at the end of each day. (If your credit card statement doesn’t show what your balance was at the end of each day, you’ll need to calculate these amounts as well.) Add those numbers, then divide by the number of days in your billing cycle.

The hardest thing to determine is what your average daily balance was during the billing cycle.

Example of total finance charges

Are you wondering how to calculate a financial burden? To give an oversimplified example, suppose your daily balances are as follows in a five-day billing cycle and all of your transactions are purchases:

Day 1: $ 1,000

Day 2: $ 1,050

Day 3: $ 1,100

Day 4: $ 1,125

Day 5: $ 1,200

Total: $ 5,475

Divide this total by 5 to get your average daily balance of $ 1,095.

The next step in calculating your total finance charges is to check your credit card statement for the interest rate on purchases. Let’s say your purchase APR is 19.99%, which we’ll round to 20% (or 0.20) for simplicity. Now you have all of the inputs you need to do the math.

($ 1,095 × 0.20 × 5) ÷ 365 = $ 3 = Total finance charges

Your total finance charge for borrowing an average of $ 1,095 for 5 days is $ 3. It doesn’t sound so bad, but if you had a similar balance for the entire year, you would pay around $ 219 in interest (20% of $ 1,095). It is a high cost to borrow a small amount of money.

On your credit card statement, the total finance charge may be shown as “interest charge” or “finance charge”. The average daily balance is only one of the calculation methods used. There are others, such as Adjusted Balance, Daily Balance, Double Billing Balance, Closing Balance, and Previous Balance. You can avoid paying high finance charges if you know which method is being used and if you pay your credit card bill in a way that minimizes or eliminates these charges.