- 1). Determine your credit card company's method for determining the balance that they charge interest on. Some companies use adjusted balance method, which calculates the balance you pay finance charges on by subtracting any payments made during the cycle from your previous balance but does not add any new payments. For example, if your previous balance was $1,000 and you paid $200, finance charges would be based on an $800 balance regardless of how much you purchased that month.
Other companies use the average daily balance method, which takes the average amount that you owe over the course of the cycle to use as your balance. Payments lower your average daily balance while new purchases usually count towards raising it.
A similar method also used is the two cycle average daily balance, which calculates your balance based on your average over the last two cycles. The previous balance calculation method uses what you owed at the end of the last period and does not take into consideration new purchases or new payments.
The ending balance method calculates your finance charge based on the balance at the end of the cycle, taking into account all new payments and purchases. - 2). Calculate the balance that you will be charged a finance charge on using the appropriate method.
- 3). Determine the periodic interest rate by dividing the annual percentage rate (APR) by 12. For example, if your APR is 24 percent, your monthly interest rate equals 2 percent.
- 4). Divide your monthly interest rate by 100 to convert it from a percent to a decimal. For example, if your monthly interest rate is 2 percent, you would divide by 100 to convert it to 0.02.
- 5). Multiply your balance from step 2 times the monthly interest rate expressed as a decimal in step 4. For example, if your balance was $800 and your monthly interest rate expressed as a decimal is 0.02, your finance charge for the month would be $16.
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