Thursday, November 24, 2022

How To Calculate Credit Card Fees

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Calculate Your True Processing Rate

Excel 2010 Business Math 41: Calculating Credit Card Fees

Your effective processing rate is your rate after adding up all processing costs, including interchange fees, processor markups, and any monthly service fees you’re paying. It’s the true percentage you’re paying for every credit card transaction.

To calculate your effective processing rate, look at your past monthly statement. You will need two numbers:

  • The total processing fee charged
  • Total amount of you processed

Then use our calculator to find your true effective processing rate.

Effective Credit Card Processing Rate Calculator x 100

In other words, the effective rate is how much it costs you to process each credit card sale. For example, if it costs you $450 to process $15,000 worth of card sales, then your effective processing rate is 3%. Each dollar you process costs you 3 cents.

Now you have an idea of what exactly you’re paying for each credit card transaction. But what does it mean? Is it good, or high? Let’s see.

What Are The Different Pricing Models For Processing Fees

We noted how credit card processing fees can fall within a specific range for each of the major credit card networks, but part of the fluctuation can be attributed to the pricing model chosen for credit card processing fees. Merchants may have the option to accept a pricing model that suits their needs best, so its important to know how each pricing model works:

  • Tiered pricing: This type of pricing model comes with different pricing for transactions in different tiers or buckets. For example, certain qualified transactions may be charged a lower rate, whereas others require a higher percentage in fees. This type of pricing typically works best for merchants who process most of their transactions in the lowest tier.
  • Flat rate pricing: Flat rate pricing works exactly as it sounds. With this pricing model, the credit card processor will charge the merchant a fixed percentage of each transaction plus a small per-transaction fee . This pricing model makes it easy for merchants to anticipate their credit card processing costs over time.
  • Interchange Plus pricing: Merchants who are offered the Interchange Plus pricing model will pay the interchange rate for each transaction plus predetermined add-on fees. With Interchange Plus pricing, you may pay the interchange rate plus an additional percentage or a small fee per transaction.

How To Calculate Your Apr

To calculate how much interest youll be charged, youll need to know your average daily balance, the number of days in your billing cycle and your APR.

Lets say you have a travel rewards credit card and an average daily purchase balance of $1,500 at the end of your 30-day billing cycle. You also have a variable purchase APR of 15.99%.

Heres how to calculate your interest charge .

  • Divide your APR by the number of days in the year.0.1599 / 365 = a 0.00044 daily periodic rate
  • Multiply the daily periodic rate by your average daily balance.0.00044 x $1,500 = $0.66
  • Multiply this number by the number of days in your billing cycle.$0.66 x 30 = $19.80 interest charged for this billing cycle
  • The math requires some work, but the concept is simple: Carry a balance, and youll pay interest.

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    Why Does Credit Card Debt Keep Growing

    With most credit card offers, every time you carry a balance from one billing cycle to the next youll be charged interest on the amount that wasnt paid off yet.

    When youre charged an interest fee, its added to your balance. If you carry any of that balance into the next billing cycle youll be charged interest on it, including the interest the credit card company added to your bill last month!

    This is called compounding. The bank charges interest on the entire balance you owe, including any finance charges you owe, every time interest is calculated. This is how credit card debt quickly snowballs into larger and larger amounts, and why its hard to make a dent in it.

    Even though an APR appears to be an annual interest rate, , not just at the end of the year. Depending on how your credit card calculates interest, you may owe more money every day you carry a balance, not just every billing cycle. Some credit cards compound interest daily, while others compound monthly.

    Interest Free Due Date:

    How to Calculate the Finance Charge on a Credit Card Balance

    In order to pay the credit card bill amount, you are generally given a credit- free period of 20 days from the date of issue of the credit card bill or the credit card statement.In case, you pay only the monthly, Minimum due amount on your credit card, which is usually only about 5 percent of the total bill amount, then you can repay the remaining outstanding balance over a period of time under the revolving credit facility. But you will have to pay a certain rate of interest om the entire outstanding amount until you pay off the complete bill of your credit card.

    Most Credit Cards have a pre- approved facility for their holders. This facility is called revolving credit, which provides you a grace/ free period on your credit purchases through the credit card. After which, if you do not pay the outstanding amount in full or the Minimum amount due, then the interest which may be 3 to 4% per month will be levied on the entire outstanding amount. Hence, the revolving credit card facility helps you pay your outstanding amount in addition of interest levied on any later date.

    How to calculate credit card fee?

    The interest free period stands withdrawn on the non-payment of credit card due.

    The formula to calculate fee/ interest on credit is explained below.

    /365.

    Example-

    Outstanding Credit Card interest- 3.5%

    Then you can calculate the interest charged by bank as follows:

    /365 × 100 = 16,478

    How Credit Card Interest works?

    How Credit Card Fee Calculator works?

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    Do Credit Card Issuers Determine Interest Rates

    Most credit card issuers charge a variable APR range based on an index rate. This means the rate youre offered isnt static, or fixed, and will adjust in tandem with a benchmark rate, typically the Federal Reserves Prime Rate. This rate is used as a baseline for many types of loans including credit cards, auto loans and mortgages, and may fluctuate depending on economic conditions and any decisions by the Fed to change it.

    When youre given an APR on your credit card of say, 17%, the issuer bases this number on the Prime Rate plus the additional percentage they choose to add on to it. The spread between the Prime Rate and what banks add on is called a margin, and its one of the ways banks profit from credit cards.

    Applying For Credit Cards

    Every hard inquiry takes a few points off your score and having too many can really add up. FICO claims that borrowers with six on their report at once can be up to eight times more likely to declare bankruptcy than those with none.

    Lenders who use FICO will probably penalize you as much as theyre going to by that point. However, inquiries are only worth 10% of your score, so theyre not the end of the world.

    Hard inquiries stay on your report for two years, but they usually stop affecting your score after one. Many credit card churners try to space out their applications because of this.

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    Balances On Your Credit Card

    Date
    None $6,000

    You’ll need to add the balances from every day in the 25-day billing cycle and divide by the length of your billing cycle .

    Here’s the math: / 25 = $4,808

    Your average daily balance would be $4,808.

    If you had a balance from the prior billing cycle, you’d include that in the addition part of your balance calculation. And if you made any payments during your current billing cycle, make sure you subtract them when you add up current balances.

    How To Use Effective Rate To Compare

    How Do Credit Card Processing Fees Work?

    Calculating the effective rate will help you compare among credit card processing providers.

    You can’t just look at individual fees. One processor may have lower transaction markups but higher service fees. Another one may have higher markups but no miscellaneous fees. It’s hard to know without comparing the effective rate.

    Take this example. Let’s assume you have $10,000 in sales each month, with $50 average ticket size. That’s 200 sales total per month.

    If you’re comparing between these 3 providers, here’s what you would get:

    Processor 1

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    How The Credit Card Sales Process Works

    Because of this, there are two things you need to keep in mind about credit card sales:

    • You might not receive payment from the customers credit card company until a later date
    • You are responsible for handling credit card merchant fees that come with accepting this type of payment

    If you want to begin accepting credit card payments, you need a point of sale system with a credit card reader. Again, accepting credit card payments comes at a costin addition to the cost of the reader or monthly flat fees.

    In some cases, you might be able to pass along swipe fees to customers. But, some state laws prohibit businesses from passing along these fees. Not to mention, some customers might be turned off from having to pay the fees.

    Because of laws and disgruntled customers, you must be prepared to cover credit card merchant fees.

    Journal Entry For Credit Card Purchases: Immediate Payment

    In most cases, you receive funds from a credit card purchase immediately. When you do, you must make a compound journal entry .

    So, how much should you debit and credit each account? To find out, subtract the credit card merchant fees from the total sale amount. This represents how much money your business actually made from the sale.

    In your journal entry, you must:

    • Debit your Cash account in the amount of your Sale Fees
    • Debit your Credit Card Expense account the amount of your fees

    Remember that the sum of your debits to the Cash and Credit Card Expense accounts must equal the amount you credit your Sales account.

    When you receive immediate payment, your journal entry for credit card purchases should look like this:

    Date
    500.00

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    How Are Credit Card Interest Rates Calculated

    Credit card interest rate is calculated as the Annual Percentage Rate of charge. It is the interest rate for the whole year rather than a monthly rate. However, while calculating interest rate for monthly dues, the monthly percentage rate will be applied to the transactions. The APR and MPR vary from one bank to another and one card to another. While applying for a credit card, its important to know how much APR is being charged on a particular card.

    How Much Does A Cash Advance Cost

    Your credit card interest rate doesn

    Not every credit card company allows cash advances, and for those that do, the rates can vary wildly. According to the New York Times, the average APR for a cash advance hovers at around 24%, nearly 10 points higher than the average rate for a regular credit card purchase, which is around 16%.

    Additionally, while most credit cards offer a grace period in which you can pay off your balance without paying any interest on it, there is no grace period on a credit card cash advance. Interest will begin incurring the moment you take out the cash and will continue to build until you pay it back in full.

    On top of all this, theres often a flat fee associated with credit card cash advances typically around 3% of the total amount you take out. That means if you take out a $1,000 cash advance, youll be paying an additional $30 in fees, on top of the interest that immediately starts accruing.

    Lets go further with that hypothetical $1,000 cash advance. Lets say the APR for cash advances on your card is 24%, and the flat fee is 3%. If it takes you a month to pay back your cash advance, youll be paying a total of $1,050 when all is said and done. Youre paying $50 for the privilege of having cash on hand, a high price to pay, no matter how convenient it is.

    If youd just made that $1,000 purchase on your credit card and paid it back within the grace period, that $50 would still be in your pocket, waiting to be put into savings, or spent on a nice dinner out.

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    Find Your Average Daily Balance

    This step is the most tedious since you’ll need to know what your balance was every day during the billing cycle. For instance, if your billing cycle is 25 days long, you’ll need to know your exact balance for all 25 days. You’ll also need to account for any balances remaining from the prior billing cycle and any new payments made during your current billing cycle.

    If you have no balance from the prior billing cycle and didn’t make any payments during the current cycle, the math is a bit easier.

    Let’s take an example where your billing cycle is 25 days and you had made these purchases:

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    Are Convenience Fees Legal

    In most states, convenience fees and surcharges are legal under a certain percentage of the purchase price. There are currently 10 states where convenience fees and surcharges are prohibitedCalifornia, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas and Puerto Rico. If a customer is illegally charged a convenience fee or surcharge in these states, they can report the retailer to the state attorneys general office.

    Surcharges over 4% are illegal everywhere. Also, a convenience fee or surcharge is illegal if the payee has not alerted you of the fee ahead of payment. There must be a sign displayed outside in the store or online stating a surcharge exists for credit card purchases and a notification of the amount of the fee at the point of sale.

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    Variable Fixed And Promotional Rates

    Are You Calculating Credit Card Annual Fee Break Even Points WRONG?

    Officially, there are 3 types of interest rates for credit cards variable, fixed and promotional. Realistically, however, there is only one. They are all variable to one degree or another.

    Some credit cards may start out with fixed and promotional rates, but inevitably those rates change, effectively becoming variable.

    Nonetheless, you may choose to start with either or fixed or promotional rate because it suits your goals. Here is a review of the pros and cons for all three:

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    Between Rewards Programs And Greater Financial Flexibility Credit Cards Have A Lot To Offer But If You Dont Know How Credit Card Interest Works Youll Have A Hard Time Maximizing Your Cards Benefits

    In an ideal world, youd never miss a monthly payment or carry a balance on your credit cards. But many Americans do carry a credit card balance from month to month. According to the Federal Reserve Bank of New Yorks Household Debt and Credit Report from the second quarter of 2020, credit card balances stand at approximately $820 billion.So, whats the problem with carrying a balance and having credit card debt? In many cases, it boils down to three letters: APR.

    Many Months Many Calculations

    Justin Pritchard

    You know how to calculate the payment and interest charges for a single month, but how can you calculate over longer periods?

    Its easiest to use a spreadsheet or a hand-built table to see the entire process of paying off your debt. The idea is the same as making an amortization table for a home or auto loan: Each row represents one payment.

    It may take a small amount of spreadsheet wizardry, but you can take it slow or start with a template, and youll have a valuable tool. With each new row, look back at the loan balance at the end of the previous month . For a sample of how your spreadsheet might look, copy the images in this tutorial.

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    When Interest Is Charged

    If you dont pay your closing balance in full by the due date that is, if you only pay the minimum amount shown on your statement, make a partial payment, or dont pay on time you will be charged interest and lose your interest-free period.

    If you lose your interest-free period, well charge interest on the unpaid balance from the day after your payment due date shown on your statement, until you repay in full. Any new purchases you make will incur interest from the day you make them until they are paid off.

    However, some types of transactions have no interest-free period, they always accrue interest from the day they are made until they are repaid in full. With CommBank credit cards this includes:

    All purchases on cards with no interest-free period accrue interest from the day you make them, until they are paid off.

    Interest is charged to your account on the last day of your statement period. If you dont pay at least the minimum amount shown on your statement by the due date, you may also be charged a late payment fee and your may be impacted.

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