Everyday Math

Math and the Consumer’s Money

What are the ways credit card companies calculate finance charges?

When the credit card issuer calculates the finance charge on a card, it applies a periodic rate to a balance. In order to calculate that balance, the company uses various methods. The most common is the average daily balance method, in which the balance is calculated by taking the amount of debt in the account each day during a specific period and averaging it. The previous balance method uses the outstanding balance at the end of the period to compute the finance charges. The adjusted balance method derives the balance by subtracting any payments made during the cycle from the previous balance, with new purchases not being counted.


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