Understanding Credit Card Bills

Anyone who uses a credit card understands the charges and payments section of their monthly bill, but few understand the remaining components. We all pay interest charges on any outstanding balance, but many are confused as to how the interest is calculated. There are four key types of credit card computation methods.

To understand the interest charges on your credit cards, you must first understand a billing period. A billing period is typically thirty days. Charges are calculated from a set day in the beginning of the month and accrue to the thirtieth day.

Adjusted Balance

Though they are not common, a small number of credit cards offer adjusted balance statements. With an adjusted balance statement, the bank takes the balance you had on the final day of the billing period. It then subtracts the amount you paid, and adds any charges made during the previous billing period. Your finance charges are then based on this new total. The interest rate you are paying is multiplied by the outstanding balance. So, if you are paying 10% in interest charges and have an outstanding balance of $2,000, your monthly finance charge is $20. This system is considered to be most advantageous to the cardholders, so many banks refuse to use this method.

Average Daily Balance

This is the system that you will commonly see on your billing statement. Your spending habits are recorded on a day to day basis with payments subtracted and charges added as the occur. At the end of the thirty-day period, an average of your spending habits are tallied and then added to your outstanding balance from the previous period. This new total is multiplied by the current interest rate. This system tends to favor the bank a little more than the other methods.

Previous Balance

With a previous balance method, your current statement takes the outstanding balance during the previous period and multiplies it by the current interest rate. This is advantageous to the card holder because there is an extra thirty days to pay off any of the previous month's charges so that the interest will never accrue on those purchases.

Two-Cycle

The two-cycle method is not commonly used. With this method, an average of your prior two month's spending activities are made to come up with an average monthly balance. This figure is used to calculate the finance charges. The two-cycle can be unfair to the card holder because an expensive emergency purchase (like car repairs) will count against you for two months, even if you paid that larger sum off a month after charging it to your card.

Your credit card company is required to state exactly what method is used to calculate the finance charge. Look over your statement carefully and make sure the method is being calculated correctly. If you spot a mistake, you have sixty days to notify your credit card company. They must acknowledge your dispute within another thirty days. Your payment will then be made on the outstanding balance minus the disputed charge.