You may have delayed the payment of purchases made through credit too long that the companies are getting back at you in the best way possible – through finance charges.  In a way, finance charges are fair for both parties since you should have paid the charge in time anyway, and the company or business establishment bears losses with the delay.  But what exactly are the factors which compute into your final finance charge figures?  The following are the basic rundown of all five aspects of finance charging.

Your Average Daily Balance is basically the total of your daily credit card balance for an entire billing cycle, divided by the days within that same cycle.  Your daily credit card balance can involve any recent purchases, balance repayments, or credit, as established by your bank.  As expected, your ADB increases proportionately with the number of purchases you make, even if this is the only transaction you are involved in for the entire billing period.  Your ADB is also dependent on your finance charge, so any changes in the latter can significantly affect the former.

Your Monthly Periodic Rate is equal to your yearly percentage charges, divided by twelve (months).  Your lender or creditor can use this factor when computing for your compounded average daily balance.  For example, if you have an ongoing yearly percentage rate of 15. 9%, your monthly periodic rate equals to 1.325% – this figure may be factored into the calculation of your finance charge as well.

The Daily Periodic Rate is equivalent to your ongoing yearly percentage rate, divided by either 365 or 366 days in a year (the latter is applicable for a leap year).  Your Daily Periodic Rate can also be considered by a creditor for calculating your compounded daily average balance.  Referring to the same example provided above, an APR of 15.9% results in a DPR of .0436% for a regular year and 0.434% for a leap year.

There are two basic ways for computing your finance charges – one way is to multiply your Monthly Periodic Rate with your Average Daily Balance, basically a compounding of the latter for an entire billing period of one month.  This procedure for calculating finance charges is rather passé, but is nonetheless still employed by some credit card companies.  If you have an ADB of 280.33 (dollars) and an MPR of 1.325%, you’ll incur 3.71 dollars in finance charges.

Your finance charges may also be credited or compounded on your daily balance – this entails that not only do you incur finance charges on your existing balance, but also on the accumulated finance charges of the previous balances.  This is the usual and obviously more gainful way which credit card companies use in computing for your finance charges, so if you’re under heavy debt from your previous balances, it’s best to settle them as soon as possible in order to prevent the charges from piling up.  Even if you add up the figures and end up with pennies in difference, remember that the figures are still reflected on your monthly statement, and can still hurt your credit.