How Is Credit Card Interest Determined?
How Your Credit Card Interest is Determined
If you don’t pay your credit card off in full each month, you’re going to have to face the unpleasant music of paying interest charges. If you are someone who pays interest charges on your credit card, you may be interested in how that credit card interest is determined. We have that information and we’re going to shed some light on the topic of credit card interest factors.
The Three Methods
There are three different methods that credit card companies use when determining your credit card interest rate -- the average daily balance method, the adjusted balance method and the previous balance method. The most common of these three is the average daily balance method.
Average Daily Balance Method
The average daily balance method, also known as the ADB method, calculates interest based on the daily balance on each day of the billing period, less the payments received, and then divides it by the number of days in the billing period. With the ADB method, the credit card company gives you credit for your credit card payment the same day they receive the payment.
When a credit card company uses the ADB method to calculate your credit card interest, it is in your best interest to send in your credit card payment as early as possible in order to reduce the amount of credit card interest you pay.
Adjusted Balance Method
When using the adjusted balance method, the credit card company calculates your credit card interest by subtracting all of the payments you have made during the current billing period. The subtract this total from the ending balance that was due from the last billing period and figure the credit card interest on that amount.
Previous Balance Method
With the previous balance method, the credit card company determines your credit card interest by calculating it based on the amount owed at the end of the last billing cycle. Payments and new purchases are excluded from the calculation and only the amount owed from the last billing cycle is taken into consideration.
If you’re not sure as to which credit card interest billing method your credit card company uses, check your terms and conditions or call and ask a customer service representative which method is used to calculate your credit card interest.