How your credit card balance can be calculated

Although the price of a credit card is usually determined by its APR and fees, there are other things that you need to consider when looking for a card. One such thing is the way in which your credit card balance is calculated. Unless you pay your balance off in full each month, it is important to understand the way in which your bill is calculated. Getting the wrong type of card with a harsh calculation system can cost you a lot of money, so it really does pay to know how your balance is worked out.

Average daily balance

The most common way that your balance will be calculated is the average daily balance method. This type of calculation means that your balance is calculated daily, so any payments or refunds are credited to the account each morning. Also, it is possible that any new purchases might be added as well. At the end of each billing period, the daily balances are added up and divided by the number of days in the billing period. This leaves you with the average daily balance. This method is not the most advantageous for cardholders, but it is the most common and is by no means the worst method used. If you find a card with a great package that uses this method, then it would be a good choice.

Adjusted balance

Perhaps the best method for cardholders is the adjusted balance method. This means that payments or credits you make during the billing period are taken away from the balance at the end of the previous billing period. Any new purchases are not included, meaning that you have until the end of a billing cycle to pay for those purchases without paying any interest. This is particularly good if you can continually pay off any new purchases that you make each month. If possible, find a card that uses this type of balance calculation method.

Two-cycle

Although there are some good methods used like the adjusted balance method, there are also bad methods like the two-cycle balance method. This method calculates the average daily balance over two billing periods rather than one. This means that if you don’t pay the balance in full, your grace period can be wiped out for months. Also, the finance charges are likely to be higher because you will be paying interest on items for two months rather than one. For example, if you do not pay the balance off in full on the first billing then the interest will become retroactive back to the purchase date. If you are someone who doesn’t pay their balance off in full, then you should definitely try and avoid cards that use this balance calculation method as it could cost you a lot of money in extra interest payments.

Paying off the balance

Although the way your balance is calculated will be a factor for most people, if you make sure that you pay your balance off in full each month then you don’t have to worry. Paying your balance off in full means that the way your balance is calculated is less important, as you won’t be subject to the interest. However, if you are looking for a card you should try and find one that uses the adjusted balance or average daily balance methods.