Credit and Taxes

Credit and Taxes

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Credit card finance charges are calculated using different methods by the issuer . Therefore , the credit card holder should be able to understand how each method works thus enabling him /her to choose cheaper source of credit

There are three methods of calculating credit card finance charges

Average daily balance

Adjusted balance method and

Previous balance method

Average daily balance

This method calculates interest based on the outstanding balance at the end of each day . The outstanding

balance is tracked each day by adjusting for any purchases and payments made

The interest can be compounded monthly or daily depending on the terms of the credit card . If the interest is compounded daily the interest is calculated on the daily balance and added to the opening balance the following day (Street Authority : 2008

Assumption : interest compounded daily

Day opening balance purchases payments closing bal . finance charge

1 600 - - 600 0 .27

2 600 .27 - - 600 .27 0 .27

3 600 .54 - - 600 .54 0 .27

4 600 .81 - - 600 .81 0 .27

5 601 .08 80 - 681 .08 0 .30

6 681 .38 - - 681 .38 0 .30

7 681 .68 - - 681 .68 0 .30

8 681 .98 - - 681 .98 0 .30

9 682 .58 - - 682 .28 0 .30

10 682 .58 - (200 ) 482 .79 0 .21

11 482 .79 - - 482 .79 0 .21

12 483 .00 - - 483 .21 0 .21

13 483 .21 - - 483 .21 0 .21

14 483 .42 - - 483 .42 0 .21

15 483 .63 100 - 583 .63 0 .26

16 583 .89 - - 583 .89 0 .26

17 584 .15 - - 584 .15 0 .26

18 584 .41 - - 584 .15 0 .26

19 584 .67 - - 584 .67 0 .26

20 584 .93 - - 584 .93 0 .26

21 585 .19 - - 585 .45 0 .26

22 585 .45 - - 585 .71 0 .26

23 585 .71 - - 585 .71 0 .26

24 585 .97 - - 586 .97 0 .26

25 586 .49 - - 586 .49 0 .26

26 586 .49 - - 586 .49 0 .26

27 586 .75 - - 586 .75 0 .26

28 587 .01 - - 587 .01 0 .26

29 587 .27 - - 587 .27 0 .26

30 587 .53 50 - 637 .27 0 .28

br Interest daily 16 ch12 ch30 4 .4 -4

Previous balance method

This method calculated the finance charges based on the balance owed at the end of the last billing cycle . This in essence means that it does not consider the current period 's payments , purchases and only credits

The monthly interest 16 ch 12 1 .33

Previous balance 600

Therefore finance charge 600 x 1 .33 8

The draw back of this method is that the issuing company can charge the credit card holder interest on balances already repaid

Adjusted balance methods

This method of calculating credit card finance charge considers all the transactions that place during the billing...