Credit Card Balance How What You Owe Is Calculated

Balance Computation Methods

If you dont have a grace period or if you plan to pay for your purchases over time it's important  to know how the credit card companies is calculating your finance charges. Which balance computation method is used can make a significant difference in how much of a finance charge you'll pay  even if the APR and your purchasing habits reminan pretty much the same.

Average Daily Balance. This calculation method is the most common. It credits your account from the day the credit card company receives your payment. To calculate the balance due, the issuer totals the beginning balance for each day in the billing period and subtracts any credits made to your account that day.

While new purchases may or may not be added to the balance, cash advances typically are included. The resulting daily balances are added for the billing cycle. Then, the total is divided by the number of days in the billing period to get the average daily balance.

Adjusted Balance. This usually is the most advantageous method for cardholders. The credit card company figures your balance by deducting payments received during the current billing cycle from the balance at the end of the previous billing cycle. Purchases made during the billing cycle are not included.

This appraisal gives you until the end of the billing period to pay a portion of your balance to avoid the interest charges on that amount. Some issuers exclude prior unpaid finance charges from the previous balance.

Previous Balance. This is the amount you owed at the end of the previous billing period. Payments, credits, and purchases made during the current billing period are not included. Some creditors exclude unpaid finance charges.

Two-cycle or Double-cycle Balances. credit card issuers sometimes calculate your balance using your last two month�s account activity. This approach eliminates the interest-free period if you go from paying your balance in full monthly to paying only a portion each month of what you owe. For instance, if you have no previous balance, but you neglect to pay the entire balance of new purchases by the payment due date, the credit companies will compute the interest on the original balance that previously had been subject to an interest-free period. Read your agreement to find out if your card issuer uses this method and, if so, what exactly is the two-cycle method is used.

How do these methods of calculating finance charges affect the cost of credit? Suppose your monthly interest rate is 1.5 percent, your Annual Percentage Rate is 18 %, and your previous balance is $400. On the 15th day of your billing cycle, the card issuer receives and posts your payment of $300. On the 18th day, you make a $50 purchase. Using the Average Daily Balance method including new purchases, your finance charge would be $4.05. Using the Average Daily Balance method excluding new purchases, your finance charge would be $3.75. Using the Average Daily Balance Double Cycle method including new purchase and the previous months balance, your finance charge would be $6.53, and using the Adjusted Balance method, your finance charge would be $1.50.

If you dont understand how your balance is calculated, ask your issuer. An explanation also must appear on your billing statements.