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Credit Cards Finance Charges

Banks, credit card companies and indeed all lenders will require that you pay some amount in order to use the funds which you've borrowed.  This figure is known as the finance charge.  It's also known as the interest rate, or the cost of the loan.  The format of the disclosure of the finance rate when you acquire a loan is standardized by the clauses of the Truth in Lending Act in the United States. 

The amount of the finance charge is developed from two factors, the amount of the outstanding balance and the amount of the annual percentage rate or APR. 

The methodology for calculating the outstanding balance on your credit card account will be different depending on which company is doing the calculations.  Since there are several different methods for balance determination, even the exact same amount of a balance on two different credit card statements can result in different charges for the amount of interest cost.

For example, the outstanding balance may be calculated over one billing cycle (usually a monthly cycle) or two billing cycles.

Another variable is whether the amount used is the adjusted balance, or not.  The most common method of balance determination is the average daily balance.  The third method is to use the previous monthly balance.
Each of these ways of determining the balance has a second variable--that of including or excluding any new purchases during the month in the new balance.  Many credit card companies give a short 'grace period' during which no interest is charged on new purchases.  Some companies, however, do not provide a grace period.

Usually the lowest costs for interest are found when the credit card company uses a one-cycle billing and either the previous month's balance, the adjusted balance or the average daily balance calculation which excludes any new purchase.

MINIMUM FINANCE CHARGE
Not all credit card issuing company have a minimum charge, but for those who do, it's usually a fairly minimum amount.  For example, the minimum finance charge may be set at fifty cents.  This means that if the interest rate on your balance calculates at only thirty-five cents, you will still be required to pay the larger amount. 

Most credit card companies have a minimum transaction amount, but most of them apply this minimum charge only when you are required to pay the finance charge, such as at the time a balance from the previous billing cycle is carried over to the current cycle.

A flat fee for some transactions can make the results look very different, but each individual should take the time to review and understand how the system works.

Again, the important thing to remember when reviewing finance charge calculations is that they are governed by the laws of the country.  The amount of the finance charge may vary a great deal from card issuer to card issuer, but the way in which the finance charge is calculated has to be clearly understandable according to the defined format and it must appear on the credit card application or solicitation.

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