Methods of Interest Calculations

In order to avoid incurring finance charges, pay your balance in full and on time every month if your credit card has a grace period. But if your card always has a balance, there is a certain method used to calculate the balance. This is crucial because it would help determine how much interest you would have to pay. Here are some of the most common methods in calculating interests.

Adjusted balance is the method wherein the start of a billing cycle is adjusted downwards for payments during the said cycle. The balance, however, will not be adjusted upward for any purchases made during the billing cycle. The payment date is not important a long as the payment was made within the cycle. The result is now multiplied by the interest rate to determine how much the finance charge is for that billing cycle.

The balances within your account per day of the billing cycle when added is what we call Average daily balance. This is another method wherein the sum of daily balances is divided by the number of days for each cycle. Any payment you make during the cycle is deducted from the amount that you owe. Purchases may usually be added in the calculation, but there are times that they are not.

The two-cycle average daily balance is a method of calculating charges in credit card financing wherein two billing cycles are added together. Then the sum will be divided by the total number of days in the two cycles. It is almost the same as the average daily balance.

Previous balance is the method where the interest rate is applied to the beginning balance of a billing cycle. Any payments or purchases made during the month will not be included in the calculation of credit card financing charge.

The last method is the Ending balance. The interest rate is applied to the end of the billing cycle. It is the exact opposite of the Previous balance method. The date and time of payments and purchases are not important since only the closing balance is included in the calculation.

These are the different methods in calculating the finance charge for every billing cycle. When you are planning to get a credit card financing loan, it is important that you are aware of these different methods so that you would not be confused on how interests and charges are computed.