Ramsey County

Making $ense of Dollars and Cents

January 7, 2008

Interesting Calculations

          The after-Christmas mail often includes credit card bills for all those holiday gifts and celebrations.   On your credit card bill, you’ll find the items you charged plus an interest fee for the privilege of using the card issuer’s money.  The amount of interest you owe is, of course, directly related to the amount you have charged on your card, but it is also affected by how the credit card company computes the interest.

          Over the years, credit card companies have developed several different methods for computing the balance on which credit card finance charges are calculated.  Federal law requires creditors to state the Annual Percentage Rate (APR) when referring to interest and the method used to compute the unpaid balance on which interest is charged.  The method your credit card company uses might be –

* previous balance method
* adjusted balance method
* average daily balance method (excluding and including newly-billed purchases)
* two-cycle average daily balance method (excluding and including newly-billed purchases)

           Let’s say you receive a credit card statement on July 1 with the following information:  Previous balance as of June 1 - $300;
Payment (on June 15) - $200; Purchase (on June 15) - $100 and the APR is 18 percent a year or 1.5 percent per month.

          Using the previous balance method of computing interest, the creditor would charge you $4.50 - 1.5% or .015 times the previous balance of $300, or $4.50. Your $200 payment on June 15 is ignored.
           Using the adjusted balance method for the same activity, you would be charged $1.50 – 1.5% or .015 times the adjusted balance ($100), which is the previous balance ($300) minus payments made ($200). This is the best deal for consumers but rarely used by creditors.

          If  a credit card company is using the average daily balance method, the creditor may figure your average daily balance either including or excluding newly-billed purchases.  Using the average daily balance method excluding newly-billed purchases, the creditor would charge you $3.00 – 1.5% or .015 times the average daily balance, which was $300 for the first half of the month and $100 for the last half, for an average daily balance of $200.

          Using the average daily balance method with newly-billed purchases included, you would be charged $3.75 – 1.5% or .015 times the average daily balance, which was $300 for the first half of the month and $200 for the second half, or $250 overall.

          While the average daily balance method has been the most common method of calculating outstanding balances, the two-cycle average daily balance method has gained popularity with credit card issuers recently. With the two-cycle method, the average daily balance is calculated on the sum of the average daily balance for the previous and the current billing cycle. This method is especially expensive for consumers who carry large balances.

          Check your next credit card statement or call your creditor(s) to determine their balance calculation method.

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524 4th Ave NE #5, 2nd Floor Ramsey County Courthouse
Devils Lake  ND  58301
701-662-7027
email - ramsey@ndsuext.nodak.edu