This finance charge calculator estimates your credit card’s or loan’s finance charge you’ll see on the billing statement by considering the amount owed, APR & cycle length. There is in depth information on this subject below the form.
How does this finance charge calculator work?
This is a handy tool that allows you forecast the value of finance charge and the new figure you have to pay on your negative credit card balance or on your loan where applicable, by taking account of these details that should be given:
- Existing balance owed;
- APR value;
- Billing cycle length that can be expressed in any option from the drop down provided.
The algorithm of this finance charge calculator uses the standard equations explained:
- Finance charge [A] = CBO * APR * 0.01 * VBC/BCL
- New balance you owe [B] = CBO + [A]
CBO = Current Balance owed
APR = Annual percentage rate
BCL = Billing cycle length corresponding index:
- If Days then BCL = 365
- If Weeks then BCL = 52
- If Months then BCL = 12
- VBC = Billing cycle length
Example of a result
In case of a credit card debt of $4,500 with billing cycle duration of 25 days and an APR percent of 19.55% will evolve in this way:
- Finance charge = $60.26
- New balance owed = $4,560.26
What is finance charge?
In finance theory, while it represents a fee charged for the use of credit card balance or for the extension of existing loan, debt of credit; it can have the form of a flat fee or the form of a borrowing percentage. The second option is most often used within US.
Usually people treat it as an aggregated or assimilated cost of the financial product they use as it proves to be treated as the other ones such as transaction fees, account maintenance costs or any other charges the client has to pay to the lender.
Finance charges were introduced with the aim to permit lenders register some profits from allowing their customers use the money they borrowed. Its value may vary on the debt type as well as on the risk profile from lender’s perspective.
Regarding the regulations across the countries it should be mentioned that there are different levels on the maximum level allowed, however extreme practices from lender’s side occur as the limit of the finance charge can go up to 25% per year or even higher in some cases.
How to calculate finance charges?
You can figure it out by applying the formula given above that states you should multiply your balance with the periodic rate. For instance in case of a credit of $1,000 with an APR of 19% the monthly rate is 19/12 = 1.5833%.
The rule says that you first need to calculate the periodic rate by dividing the nominal rate by the number of billing cycles in the year. Then the balance gets multiplied by the period rate in order to have the corresponding amount of the finance charge.
Finance charge calculation methods in credit cards
Basically the issuer of the card may choose one of the following methods to calculate the finance charge value:
First two approaches either consider the ending balance or the previous balance. These two are the simplest methods and they take account of the amount owed at the end/beginning of the billing cycle.
Daily balance approach that means the lender will sum your finance charge for each day of the billing cycle. To do this calculation yourself, you need to know your exact credit card balance everyday of the billing cycle by considering the balance of each day.
Adjusted balance method is a bit more complicated as it subtracts the payments you make during the billing period from the balance at the cycle’s beginning.