CHASE - CREDITCARDS

Understanding Finance Charges And Payment Allocations

How are finance charges calculated?

The finance charge is the amount you pay to use credit. Finance charges depend on your APR and your outstanding balance. Credit card companies use one of various methods to calculate your outstanding balance. The method they use can make a big difference in your cost of credit. These are the ways your card issuer may compute your balance:

• Over one billing cycle or two cycles

• Including or not including new purchases during the time period

• Using the average daily balance, adjusted balance, or the previous balance

Average daily balance—This is the most common method. This method credits your account from the day the issuer receives your payment. The card issuer totals the beginning balance for each day and subtracts any credits made to your account that day to figure your balance due. New purchases may or may not be included in the balance, depending on your terms. However, issuers usually include cash advances in your balance. Each daily balance is added into the total for the days in the billing cycle. To compute the average, the total is divided by the number of days in the billing period.

Adjusted balance—To calculate the adjusted balance, the issuer subtracts your payments and credits received during the billing period from the balance at the end of the previous period. New purchases during the current billing cycle are not included. This method allows you to avoid some interest charges by paying a portion of your balance before the end of the billing cycle.

Previous balance—This is the amount owed at the end of the previous billing cycle.

How are payments applied and why does it matter?

You might have different types of balances with different APRs, depending on your terms and how you use your card. Usually your credit card issuer applies your payment first to the balance with the lowest APR.  For example, you may have a balance for cash advances, balance transfers, and for purchases. Your payments will not reduce the balances with higher APRs until you have paid the lower APR balances in full. You may pay longer on the higher APR balances, which may cost you more in interest.

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