The Various Methods of Figuring Interest
Figuring your finance charge is generally not so difficult. This is usually figured by the amount of your outstanding balance of your card and the reflection of the current APR you are being charged. Credit card issuers use several ways to determine your charges. The final outcome of these various methods is different so it pays to know what type you are being treated to/
The credit card issuers have several ways to figure interest and finance charges with the outstanding balance of your account. The method can make a big difference in the finance charge you'll pay. Your outstanding balance may be calculated using the adjusted balance, previous balance (sometimes referred to as two-cycle), or the average daily balance as the reference point. Depending on the Issuer, there are many combinations of inclusions and exclusions; so be certain to read the particular terms of service.
The average daily balance is the most common calculation method for interest and or finance charge rates. Every morning usually in the billing period, the balance is updated with credits or refunds. With some VISA, MasterCard, or American Express cards; any new purchases may be also added. When the end of the billing cycle comes around, daily balances are added and divided by the number of days in the billing cycle to arrive at the "average daily balance."
The adjusted balance method is the most beneficial method for cardholders. During the current credit billing cycle credit cards that are received are subtracted from the balance of the prior billing cycle. Purchases and/or cash advances made during the billing cycle are not reflected in the total. Basically, if you pay your bill before the end of the billing cycle you don't get stuck with finance charges.
With the previous or two-cycle balance method, the average daily balance is figured from two billing cycles rather than a single one. As a consequence, this increases the finance charges one must pay normally. There is no grace period involved with this method and if you dont pay the amount due in full, the charges may be made retroactive back to the time of the original purchase.
It is also important to note that many credit cards also carry a minimum finance charge. Regardless if your calculated finance charge is lower, you will still be required to pay this charge. However, if no purchases or cash advances have been made during the duration of the billing cycle, generally you will not be assessed and charges. Nevertheless it is generally wiser to check the particular card in question's terms of service and fee schedule.
About the Author
Author Sam Donaldson of http://www.credit-cards-with-rewards.com/ has over 20+ years experinece in matters of credit and is a resident of Las Vegas, Nevada.
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