Wednesday, August 8, 2012

Exploring the various types of Interest Charges

The interest charge for your personal credit cards is figured by the current amount of your balance on your credit card account and the APR or Annual Percentage Rate you are being charged for. Credit card issuers tend to use one of several methods to determine your interest and/or finance charges. The end game of theses various types is not the same; so it is best to know the differences literally. The finance charge is the dollar amount you pay to use credit. The amount depends in part on your outstanding balance and the APR.

Credit card companies use one of several methods to calculate the outstanding balance. The method can make a big difference in the finance charge you'll pay. Your outstanding balance may be calculated using the adjusted balance, previous balance (sometimes referred to as two-cycle), or the average daily balance as the reference point. Check your card agreements terms if new purchases and/or cash advances are also included or excluded as this varies from provider to provider.

The average daily balance is the most common calculation method for interest and or finance charge rates. Every morning usually in the billing period, the balance is updated with credits or refunds. With some credit card issuers, any new purchases are also added. When the end of the billing cycle comes around, daily balances are added and divided by the number of days in the billing cycle to arrive at the "average daily balance."

The adjusted balance method is the most beneficial method for cardholders. Credits received during the current billing cycle are deducted from the balance at the end of the previous billing cycle. Cash Advances you may of received made during the period for the billing usually are not reflected on the total. Basically, if you pay your bill before the end of the billing cycle you don't get stuck with finance charges.

With the previous or two-cycle balance method, the average daily balance is figured from two billing cycles rather than a single one. This tends to increase the finance charges one must usually pay. There is no grace period involved with this method and if you don't pay the amount due in full, the charges may be made retroactive back to the time of the original purchase.

It is also important to note that many credit cards also carry a minimum finance charge. Regardless if your calculated finance charge is lower, you will still be required to pay this charge. However, if no purchases or cash advances have been made during the duration of the billing cycle, generally you will not be assessed and charges. Nevertheless it is generally wiser to check the particular card in question's terms of service and fee schedule.

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