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Choosing a Credit Card: Balance Computation Methods

(continued from Choosing a Credit Card: The Deal is in the Disclosure)...

Average Daily Balance. This is the most common calculation method. It credits your account from the day the issuer receives your payment. To figure 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 issuer determines your balance by subtracting payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the billing period aren’t included.

This method 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 creditors 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. 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 each month to paying only a portion each month of what you owe.

For example, if you have no previous balance, but you fail to pay the entire balance of new purchases by the payment due date, the issuer 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 issuer uses this approach and, if so, what specific 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 APR is 18 percent, 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. Average Daily Balance method (excluding new purchases), your finance charge would be $3.75. Average Daily Balance Double Cycle method (including new purchase and the previous month’s balance), your finance charge would be $6.53. Adjusted Balance method, your finance charge would be $1.50. If you don’t understand how your balance is calculated, ask your card issuer. An explanation also must appear on your billing statements.

(continue on to Choosing a Credit Card: Other Costs and Features)...

American Consumer Credit Counseling (ACCC) is a leading source for personalized debt management advice and programs to consolidate your debt. If you are interested in consolidating debts, contact one of ACCC's credit advisors to learn how to consolidate bills without having to take a consolidation loan as would be suggested by some other debt relief agencies. As a Better Business Bureau accredited credit counseling agency, you can count on ACCC for fair and honest help with credit issues. We are also approved by the Department of Justice to provide pre-bankruptcy counseling and post-bankruptcy credit counseling courses.

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