Most consumers pay the credit card finance charges but do not have any idea how the credit card company comes up with the number nor what is the best way to reduce these charges. This article explains the four most common credit card finance charges calculation methods. However, the method along cannot heko you analyze your situation: you must make sure you're getting the best deal on your credit card by asking the company about the following:

1. The method they use to calculate the chages
2. Whether interest is calculated on a daily or monthly basis.
3. Is there a grace period for new purchases?

Here are the credit card finance charges calculation methods:

Average daily balance

Using this method, the company will simply average your daily balance. For instance, if you charged $100 on the first day of July and $200 on the 17th, your average daily balance would be $150. Your monthly finance charge will be that number times approximately 1/12th your annual percentage rate (APR). Interest may be calculated on a daily or monthly basis.

Daily balance

The company calculates the actual balance you carried each day of your billing cycle and multiplies it by roughly 1/365th of your APR and adds it together.

Two-cycle balance

This method is similar to an average daily balance except that the daily average is based on your last two billing months, not just one. So if you don't pay off your card in full one month, you'll be hit with retroactive interest on your next bill.

Previous balance

The bill will show beginning balance and ending balance for your account. The finance charge is based on the outstanding balance at the beginning of the billing cycle.