Chapter 4, Section 2 Credit Card Finance Charges

How are finance charges calculated?  They are calculated based on your APR and using a monthly or daily periodic rate.  To find the periodic rate, divide the APR by 12 or by 365 and round to the nearest ten-thousandth (4 th spot after the decimal).

Formula for Finance Charge  Balance subject to finance charge x periodic rate x number of periods  Example 1  Check Your Understanding A & B

How do credit cards figure the balance subject to finance charges?  The balance can be found by several methods—previous balance method, OR adjusted balance method.

So how does the “previous balance method” work?  It charges interest on the balance in the account on the last billing date of the previous month.  Any payments, credits, or new purchases in the current month are NOT INCLUDED in the previous balance.  New balance= (finance charge + new purchases + fees) – (payments/credits)  Example 2  Check your understanding C & D

How does the “adjusted balance method”?  This method subtracts payments and credits during this month from the balance at the end of the previous month.  Purchases and fees made during the current month are not included in the adjusted balance.  Adjusted balance = previous balance – (payments + credits)  New Balance = adjusted balance + finance charge + new purchases + fees  Example 3  Check your understanding E & F

Let’s Practice!  P , 5-16