There is an increase in Credit Card users and it is important that you understand how the charges are charged on the finance. Different Credit Card providers use different method to calculate the finance charges. Some companies may disclose the method and the interest rate that is being charged, but some may not.
What is finance charge?
Finance charge allows credit card companies and lender to make profit off of you. It is the total cost of borrowing and it includes interest, fees and other charges. If you know the finance charge, you can budget in a better way and determine how much money you are saving through a particular Credit Card.
Most lenders calculate finance charge using the one cycle finance charge including purchase or the one cycle finance charged not including purchases.
You also need to be aware of the outstanding balance on your Credit Card and the total number of days included in each billing cycle. You may have to calculate the new purchases in your outstanding balance depending on the method used by the provider.
How to calculate one cycle finance charges?
The average daily balance including new purchases is the balance divided by the total number of days in the billing cycle. The finance charge is the amount adjusted for the number of billing cycles in a year multiplied by the average daily balance.
The average daily balance excluding new purchases is the added up outstanding balance for each day in your billing period divided by the total number of days in the billing cycle.
Which charge is the best?
Cards charging one cycle finance charges including purchase should be avoided as there is no grace period. The finance charges will not be affected, if you use the card to transfer balance and not make purchase on it.
Cards charging one cycle finance charges excluding purchase is ideal for those who use credit cards to purchase groceries and gas.
Guide on how finance charges are calculated
To understand how finance charges are calculated, let’s assume that you have a zero balance on your credit card. You then go to a retail store and buy groceries of AED500. You buy a new phone AED3,000. You now have an outstanding balance of AED3500 and the minimum payment is AED200. The due date is the 2nd day of the next month. Let’s assume you missed the deadline and the lender is charging a late payment fee. 10% is charged as a late payment fee, so the amount charged is AED60.
The interest is charged on Annual Percentage Rate and the rate is adjusted against the number of billing cycles in the year. If the Annual Percentage Rate is 18%, the monthly rate will be 1.5%. Therefore, the finance charge will be 1.5% of the average daily balance. The finance charge is the amount that is adjusted for the number of billing cycles in a year multiplied by the average daily balance.
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