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Personal Finance Math 4: Calculating Credit Card Finance Charges, Part 3: By the previous balance method
How to reconcile results found on your credit card statements. In this anicast we calculate credit card finance charges and new balances using the previous balance method.
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In the previous balance method, the previous balance on the last billing date of the previous month is applied as the balance subject to finance charges.
So finance charges are calculated by multiplying the previous balance by the periodic rate and number of periods.
The new balance is found by using the formula: previous balance plus finance charge plus new purchases plus fees minus payments and credits.
For example, Mrs. Winters’ credit card uses the previous balance method, a daily periodic rate and an APR of 17.2%.
In a 31-day billing cycle, there was a previous balance of $7,312, new purchases of $337.14 and credits of $447.
Calculate the finance charge and new balance.
The daily periodic rate is the APR divided by 365, which is 17.2% divided by 365 or 0.000471.
The finance charge is product of the previous balance, the daily periodic rate and the number of periods, or $7,312
times 0.000471 times 31, which is $106.76, rounded to the nearest penny.
The new balance is the previous balance plus finance charge plus new purchases plus fees minus payments and
credits, which is $7,312 plus $106.76 plus $337.14 minus $447 or $7,308.90.