Finance Charges
To make matters a bit more complicated, different credit card issuers calculate
finance charges in different ways. Some card companies give you a stretch
during which no interest is charged for your new purchases; others start the
finance charge meter running the minute you make a purchase.
It all comes down to whether or not the company includes new purchases in
your outstanding balance, which is the amount on which finance charges are
computed.
Credit card issuers can calculate your outstanding balance in a variety of
different ways. These include:
- average daily balance method, including new purchases;
- average daily balance method, excluding new purchases;
- two-cycle average daily balance method, including new purchases;
- two-cycle average daily balance method, excluding new purchases;
- adjusted balance method; and
- previous balance method.
With the average daily balance method, your outstanding balance is averaged
for the billing cycle. So, the company adds up the outstanding balance for
each day during the billing cycle, taking into account any payments you may
have made or credits received, then divides by the number of days in the billing
cycle.
Whether or not the company includes new purchases in this balance can make
a big difference in the finance charge you pay. If the company excludes new
purchases, you essentially get to own those products interest-free until the
beginning of the next billing cycle.
The two-cycle average daily balance method works much the same way, except
it takes the current and the preceding billing cycle into account in computing
the outstanding balance.
The adjusted balance method is perhaps the easiest to understand. It’s
simply the outstanding balance at the beginning of the billing cycle, less
any payments or credits during that billing cycle.
Finally, the previous balance method is the outstanding balance at the beginning
of the billing cycle (ignoring any payments in the interim).
The methods that normally result in the lowest finance charges—and,
therefore, work best for the consumer—are:
- the average daily balance method, excluding new purchases;
- the adjusted balance method; and
- the previous balance method.
Next: Look for the
"Schumer Box" |
