How Credit Card Bills Are Calculated

Each month, millions of people receive a paper bill in the mail from their credit card companies, or they visit the company’s website to get their bills electronically. Even though they submit a payment, they do not necessarily know what all of the fees and sums on the bill mean.

Let’s take a closer look at what’s on a credit card statement:

Current Charges or Transactions –

This is a list of all the transactions that have occurred since your last statement (purchases, payments, credits, cash advances, and balance transfers). Some credit card companies group them by the type of transaction. While others list them by the date of the transaction or by the user, if there are different users on the same account.

Many parents of teens are happy that they can scour the bill for current charges. By doing so, they can find out if their kids are using the money to buy learning materials for college or if they booked a spring break trip for themselves and all of their friends on the card. Reviewing the current charges is also a way to save money. People can see what they have spent money on this month and decide to cut frivolous expenses out of their spending plans in the future.

Previous Charges –

This area is for the charges or transactions that were not paid off in the past. These charges still remain and they need to be dealt with. Credit card companies must list the fees and interest charges separately on your monthly statement. Interest charges must be listed by type of transaction. For example, you may be charged a different interest rate for purchases than for cash advances.

For people who are struggling with credit card debt, this section may be the most expensive one of the entire bill. Charges can stay on credit cards for years or decades to come if you don’t pay your bill in full every single month. Some individuals may get discouraged by this section because it makes it seem like getting out of debt is totally impossible and will never happen. If you have this feeling then it’s time to get some help. Speak to a certified credit counselor at a non-profit credit counseling agency. The call is completely free and 100% confidential. They can break it all down for you and let you know about your debt relief options and what to do next.

Interest Rates –

Virtually all credit cards come with interest rates. Some may have a special introductory rate of 0% but that will only last a short while (a few months if you’re lucky) and then the true interest rate will start and you’ll be charged accordingly. The interest is a percentage of the total debt that is added onto the bill each and every month. People also tend to spend a significant portion of their money on the interest rate charges.

The higher the interest rate, the worse the credit card is because it carries a heavy risk of landing you in serious debt if it’s not paid off in full every month.

Depending upon the amount of debt that individuals have, it might be years for the majority of their payment to start going towards the principle amount. Individuals who are struggling with credit card debt may want to call a credit counseling agency to see if they can help lower interest rates on their credit cards.

Fees –

Some credit cards charge an exorbitant amount of fees. These fees might come on a monthly basis, or users may have to pay them each year. They could also come with different types of transactions, so that means with every purchase. Finding credit cards without any fees is a possibility, but you’ll need a great to excellent credit score to be considered for one of those. Therefore, when individuals are starting to look into different credit cards, they should find ones that will not charge them an annual fee just for having the piece of plastic. The better your credit score is, the better deals and offers you will receive on some credit cards.

The fees that you may see could include: annual membership fee, late fees, over-the-limit fees, balance transfer fees, and cash advance fees. You want a credit card that has the least amount of fees at the lowest amount possible. Fees are another huge factor when it comes to having some debt problems.

Payments –

This section will include some previous payments that were made on the account. It may only show the most recent last payment or it could show a few last payments. This section will most likely also include the total balance due, the minimum amount due, and the date your payment is due. A payment is usually considered to be on-time if it’s received by 4 pm on the day that it’s due. However, every lender is different, so make sure you know exactly when your lender considers a payment to be on-time. There may also be a late payment warning section close by. This section shows additional fees/penalties and the higher interest rate that may be charged if your payment is late.

Some people make small payments on their credit cards throughout the month. For example, they might want to try to make a payment before the interest charges hit for the month so they can reduce the amount on which they need to pay interest. These payments should be reflected on the bill. If they are not, people should call to find out if they were not processed or if they were somehow missed.

Check out these 2 great examples with pictures to help you see where these sections are usually located on a credit card statement: https://www.wellsfargo.com/credit-cards/statement/ and http://www.mycreditunion.gov/Pages/pocket-cents-understanding-credit-card-statement.aspx

Does It Matter How Your Credit Card Company Calculates Finance Charges? The answer is YES!!!!


Take a look at this example of a 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 then 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.

Conclusion –

Credit card bills contain an array of figures on them and can be very confusing at times. Individuals should make sure that they know what the different amounts represent so that they can have a greater sense of their current financial situation and keep themselves out of financial trouble.

If you don’t know which balance calculation method your credit card company uses then call the customer service department and find out. If you need additional help understanding your credit card statement, don’t hesitate to give us a call at 1-866-699-2227 and ask to speak to one of our certified credit counselors. They will be more than happy to help you!

Author: Lauralynn Mangis
Lauralynn is the Online Marketing Specialist for AdvantageCCS. She is married and has two young daughters. She enjoys writing, reading, hiking, cooking, video games, sewing, and gardening. Lauralynn has a degree in Multimedia Technologies from Pittsburgh Technical College.