Conventional or Traditional Finance
If you continued making minimum payments and no additional charges on this account, you’d pay $18.00 in finance charges over the course of a year. Why Does the Billing Cycle Matter? Credit card companies state your interest rate in terms of an annual percentage rate, or APR, to make it easier to compare various credit cards and loans. However, you are not charged interest on an annual basis. You’re charged interest periodically based on your billing cycle. Including the billing cycle in the finance charge calculation ensures you are charged interest only for that specific period of time.
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The average daily balance method is one of the ways a credit card issuer can calculate finance charges on your credit card. Finance charges are how your credit card issuer charges interest on balances you carry beyond the grace period. Paying a finance charge increases the cost of your credit card debt beyond the original purchase price. Knowing how your credit card issuer calculates your finance charge can help you estimate the amount of interest you’ll pay if you don’t pay your balance in full. You can check your credit card billing statement or call your credit card issuer to find out if your credit card issuer uses the average daily balance method for calculating finance charges.
In a separate section that breaks down your interest charges, you’ll see a break down of your finance charges by the type of balances you’re carrying. For example, if you have a purchases balance and a transfer balance, you’ll see details of the finance charges for each. This is because these balances often have different interest rates and grace periods. How to Pay Off Your Finance Charge. Making your minimum credit card payment, which is printed on the first page of your credit card billing statement, is usually enough to cover your finance charge plus a small percentage of the balance. However, if you’re only paying the minimum payment, your balance will shrink at a small pace since so much of the payment goes toward paying interest. You’ll need to increase your minimum payment if you want to pay off your balance faster.
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