Investor's wiki

Total Finance Charge

Total Finance Charge

What Is Total Finance Charge?

A finance charge is the total amount of money a consumer pays for borrowing money. This can remember credit for a vehicle loan, a credit card, or a mortgage. Common finance charges incorporate interest rates, origination fees, service fees, late fees, etc. The total finance charge is normally associated with credit cards and comprises of the unpaid balance and different fees that apply when you carry a balance on your credit card past the due date.

How Total Finance Charge Works

Toward the finish of each billing cycle on your credit card, in the event that you don't pay the statement balance in full from the previous billing cycle's statement, you will be charged interest on the unpaid balance, as well as any late fees in the event that they were incurred. Your finance charge on a credit card depends on your interest rate for the types of transactions you're carrying a balance on. These incorporate purchases, balance transfers, and cash advances, every one of which could have an alternate interest rate, and in this manner an alternate amount you owe in every one of those categories. Your total finance charge gets added to every one of the purchases you make — and the excellent total, plus any fees, is your month to month credit card bill.

Credit card companies calculate finance charges in various ways that numerous consumers might view as confounding. A common method is the average daily balance method, which is calculated as (average daily balance \u00d7 annual percentage rate \u00d7 number of days in the billing cycle) \u00f7 365.

To calculate your average daily balance, you want to take a gander at your credit card statement and see what your balance was toward the finish of every day. (In the event that your credit card statement doesn't show what your balance was toward the finish of every day, you'll need to calculate those amounts also.) Add these numbers, then, at that point, partition by the number of days in your billing cycle.

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

Illustration of Total Finance Charge

Considering how to calculate a finance charge? To give a distorted model, assume your daily balances were as per the following in a five-day billing cycle, and every one 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

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

The next step in computing your total finance charge is to check your credit card statement for your interest rate on purchases. Suppose your purchase APR is 19.99%, which we'll round to 20% (or 0.20) for the good of straightforwardness. Presently you have every one of the information sources you want to do the calculation.

($1,095 \u00d7 0.20 \u00d7 5) \u00f7 365 = $3 = Total finance charge

Your total finance charge to borrow an average of $1,095 for 5 days is $3. That doesn't sound so terrible, yet in the event that you carried a comparative balance all year long, you'd pay about $219 in interest (20% of $1,095). That is a high cost to borrow a small amount of money.

On your credit card statement, the total finance charge might be listed as "interest charge" or "finance charge." The average daily balance is just one of the calculation methods utilized. There are others, for example, the adjusted balance, the daily balance, the double billing balance, the ending balance, and the previous balance. You can try not to pay high finance charges assuming you understand what method is utilized and pay your credit card bill in a manner that limits or disposes of these charges.

Highlights

  • A finance charge is the cost of borrowing money and applies to different forms of credit, for example, vehicle loans, mortgages, and credit cards.
  • Common instances of finance charges incorporate interest rates and late fees.
  • A total finance charge is regularly associated with credit cards and addresses all fees and purchases on a credit card statement.
  • A total finance charge might be calculated in somewhat various ways depending on the credit card company.