If you started the credit card billing cycle with a balance, you’ll probably notice a finance charge added to your balance. The finance charge is a fee you pay for carrying a credit card balance beyond the grace period. Finance charges increase the amount you pay for having a credit card.
Finance charge is calculated using your interest rate and your credit card balance. The higher those two factors, the higher your finance charge will be. Not all credit cards calculate finance charges the same way. Your credit card finance charge could be calculated using one of these methods:
Average daily balance method: averages your credit card balance for each day of the billing cycle then multiplies by the periodic interest rate (your annual percentage rate divided by 12) to come up with your finance charge.
Daily balance method: multiplies each day’s credit card balance by the daily interest rate (your annual percentage rate divided by 365 or 366 in a leap year), then adds each of them together.
Adjusted balance method: Starts with the balance at the beginning of the billing cycle, then subtracts any payments and made. The result is multiplied by a periodic rate.
Ending balance method: Starts with the balance at the beginning of the billing cycle, then subtracts payments and credits, then adds charges made. The result is multiplied by the periodic rate.
Previous balance method: The balance at the end of your previous billing cycle is multiplied by the periodic rate.
Credit card issuers are no longer allowed to assess a finance charge on any balance that has already been paid. Before credit card legislation prohibited double billing cycle finance charges on February 22, 2010, credit card issuers sometimes billed a finance charges on your current and previous month’s average daily balance.
You can avoid paying a finance charge by paying your credit card balance before the grace period ends. However, you may not have a grace period if you already had a credit card balance at the beginning of the billing cycle. In that situation, you won’t avoid a finance charge. Cash advances and balance transfers often do not have a grace period. Finance charges begin accruing on those types of balances immediately.