Credit Card Expertise

How is Credit Card Interest Calculated?

By Jeffry Evans on | From personalfinanceresources.com

It is important to know how credit card interest is calculated. It is not calculated the same way that a CD or an interest bearing savings account is calculated. The key problem for the consumer is that the credit card interest rate is calculated daily. I’ll will explain more in a minute on this. First let’s go over the typical balance types that credit card companies use:

Average Daily Balance
By far the favorite of credit cards. Every day, your balance is recalculated with any payments, adjustments and/or additional finance charges. With some credit cards, new purchases are also included in this calculation. At the end of the month, these daily balances are averaged over the number of days in the billing cycle.
Two Billing Cycle Balance
This method is most advantageous for the credit card company. This method is an extension of the average daily balance method, but utilizes two billing cycles to come up with the average daily balance. The typical grace period (which is usually 28 days) is non-existent under this method. Also, all your payments, regardless of size, do not truly reflect in the interest calculation until two fulls months later. Definitely shy away from this kind of offer.
Adjusted Balance
If possible, this is the method you want to be using. Under this method, all payments and credits are subtracted from the preceding billing period ending balance. Therefore all interest calculations for the current month are being exacted on a lesser balance.

So when you are shopping credit card offers, take the above information into consideration. It may not sound like it makes much of a difference, but you will see in a moment just how much of a difference it can make. Remember above how I said that credit card interest is calculated daily? This is how virtually all credit cards calculate interest. This means that every day compounded interest is added to your balance. But Jeffry, I don’t see it reflected in my balance, what are you talking about?

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