 # Alternate Math – Credit Card Finance Charges

##### Join me as we learn how to calculate Finance Charges for a credit card.

Today we’re going to be looking at fi credit card finance charges so if you do not pay your credit card balance and full by the due date you will be assessed a finance charge you will also lose the grace period for new purchases finance charges will be charged on new purchases from the day that they are made the finance charge rates on credit cards are advertised

By annual percentage rate but finance charges are calculated using a monthly or daily periodic rate to find your periodic rate you’re going to take the apr and divide it you’re going to divide it by 12 for monthly or 365 for daily then to find the actual periodic finance charge the fee you’re gonna owe and take the balance and multiply it by your periodic rate

That you just found multiplied by the number of periods that are calculated so we are going to use these formulas for the examples below so the first problem is jackie’s charged our finance charge on a credit card balance of 500 her card has an apr of 15 we need to find her finance charge using a monthly periodic rate and then using a daily periodically rate for

A 31 billing cycle so first let’s just start off with the monthly so first thing we’re going to do is find the periodic rate so you’re going to take the apr apr is 15 percent and we are going to divide it by monthly it’s 12. so we’re going to take 15 and divide it by 12 and we get 1.25 percent so the next step we have to do is rewrite our percent as a decimal

So one point two five percent as a decimal we move the decimal places two points to the left and we get point .0125 and then now we’re going to use our formula the formula above so we take the balance our balance is five hundred dollars we’ll multiply it by our decimal here for our periodic rate so point zero one two five multiplied by number of periods here

There’s only one period unless they state otherwise so we’re getting 500 times 0.0125 and we get 6.25 so six dollars and 25 cents now let’s do the same problem but dealing with a daily periodic rate so daily it’s 365 so we’re going to take the percent 15 and divide it by 365 to find the new rate and when we do that we get point zero four one one percent now

We need to change that to a decimal the percent to a decimal so i move the decimal places two places to the left so our percent changes to a point zero zero zero four one one now we need to use a formula so take your balance five hundred dollars multiply it by your periodic rate 0.000411 times the number of periods here it tells you for a 31 billing day cycle so

We’re multiply it by 31. and when we multiply this out we get six dollars and 37 cents so if you’re comparing the two companies one that uses a monthly rate one that uses daily rate you want the rate that has the last fee so here doing a monthly rate it’s better off because you’re going to pay less money let’s look at the next example the balance of sue’s credit

Card that is subject to a finance charge is 221.68 her card has an apr of 18 and uses a monthly periodic rate what’s her current monthly finance charges so take your percentage 18 and we’re using monthly so we’re going to divide it by 12. 18 divided by 12 is 1.5 but it’s a percent and don’t forget we have to change the percent to a decimal so i’ll move it two

Places to the left so our periodic rate is point zero one five now here’s the formula two hundred twenty one dollars sixty-eight cents the balance times your rate 0.015 times the number of periods monthly it’s just calculated once here when you multiply this through you get 3.33 cents for your periodic financial charge okay let’s look at the previous method

Balance or balance method the amount of the finance charge depends on your periodic rate and how the car company figures the balance subject to the finance charges the balance can be found several different methods the previous balance method charges interest on the balance in the account on the last billing day of the previous month so any payments credits or

New purchases in the current month are not included in the previous balance so your new balance is equal to your previous balance plus finance charges plus new purchases plus new fees subtracting out any payments and subtracting out credits so let’s look at a couple examples laura’s car company uses a previous balance method and a monthly periodic rate to figure

The finance charge find the finance charge of the month for the month and the new balance so here’s her statement so first thing we need to do is find the monthly periodic rate and the monthly periodic rate is we take our apr 18 divided monthly so divide it by 12. and we get 1.5 change it to a decimal we get .015 now we need to find the finance charge so using

The formula from before we take the previous balance 225 dollars and 60 cents times the periodic rate 0.015 times the number of periods which is one when you multiply this through you get three dollars and 38 cents so when you think of this as a fee so it’s going to be let me add it in so when we do our new balance we’re going to take our previous balance we’re

Going to add in our finance charge we’re going to add in our purchases and fees and then we’re going to subtract out any payments and then any credits which we don’t have any oh our payments and credits are bumped in together so we’re subtract that out so when we add these values together and subtract out our payments and credits we have a new balance of 30