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Credit Card Blog - Credit Card Balance Computations

 Thursday, 12 October 2006

If you're like most people, you're probably confused by a lot of what's printed on your credit card statement. Don't feel bad. Those statements aren't the most clearly written pieces of text and much of it is legalese in tiny print. While that legalese does define exactly how the issuer calculates your balance, I'll try to explain the basics of the various methods used.

Average Daily Balance

This is the method your credit card issuer probably uses. Any payments you send in are credited (i.e. deducted from your balance) the day the issuer receives them. The issuer calculates a series of these daily balances for the duration of the billing period. Whether new purchases are added to your balance depends on the particulars of your credit agreement, but cash advances are almost always added. The series of balances are added together and then divided by the number of days in the billing period. The result is your average daily balance.

Adjusted Balance

At the end of the billing period, right before they print and mail your bill, the issuer subtracts any payments made during the current billing period from the balance at the end of the previous billing period. New purchases are not included. Adjusted balance is usually the best for you as it gives you the rest of the billing cycle to pay part of the balance and avoid paying interest on that amount.

Previous Balance

This one is just what it sounds like. It is simply the amount you owed at the end of the previous billing period. No payments or new purchases made during the current billing cycle are included.

Two-cycle Balances

Some issuers use methods that include 2 billing cycle's worth of activity to calculate your balance. The use of two-cycle methods is not as common as the other methods and they vary a bit from issuer to issuer. Carefully read your credit agreement to find out if your issuer uses a two-cycle method and what specific method they are using.

Reading your agreement carefully is good advice for anyone with a credit card. It spells out your rights and responsibilities along with many other details about your card. If there are parts you don't understand call your issuer and ask them to explain.

Thursday, 12 October 2006 18:34:42 (GMT Daylight Time, UTC+01:00)  #     
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