How Credit Card Bills are Calculated

Does It Matter How Your Credit Card Company Calculates Finance Charges?

Take a look at this credit card account and see if it would matter to you.

APR - 19.8%

The account started out with a zero balance the first month. The account holder then charged $1,000 and made the minimum payment. The next month, the account holder charged another $1,000 and paid off the balance due.

Here’s how much you’ll pay in interest charges if your credit card company uses . . .

Average Daily Balance Method, including new purchases: $33
Average Daily Balance Method, excluding new purchases: $16.50
Two-Cycle Billing, including new purchases: $49.05
Two-Cycle Billing, excluding new purchases: $32.80

As you can see, the calculation method can cause the balance to vary widely, and since your finance charges are based upon your balance, you can end up paying a lot more for your credit because the balance calculation method takes more money out of your pocket.

Just what do those balance calculation method terms mean?

Average Daily Balance: The company averages your daily balance. Let’s say you charged $100 on the first day of September and $200 on the 16th. Your average daily balance would be $150. That number times roughly 1/12th your annual percentage rate (APR) equals your monthly finance charge. Interest may be calculated on a daily or monthly basis. Most credit card companies take into account any new purchases made throughout the month.

Daily Balance: The credit card company calculates the actual balance you carried each day of the billing cycle and multiplies it by roughly 1/365th of your APR and adds it together. Not many credit card companies use this calculation method.

Two-Cycle Balance: With the two-cycle method, the average daily balance is calculated from two billing cycles rather than one and finance charges are typically higher than the average daily balance method. This method, in effect, wipes out the grace period for customers who carry a balance. If the bill is not paid in full at the first billing, interest becomes retroactive back to the purchase date. Most credit card issuers use the single-cycle average daily balance method to calculate finance charges.

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

If you don’t know which balance calculation method your credit card company uses then call the customer service department and find out.