# Previous Balance Method for Calculating Finance Charges

Previous Balance Method for Calculating Finance Charges.

Some of these credit card providers use a method called the previous balance method to calculate your monthly finance charges.

## Explanation of the previous balance | Previous Balance Method for Calculating Finance Charges

The balance at the beginning of the billing cycle is used by this method to calculate the finance charges for this billing cycle. This means that none of the activities performed on the account in this monthly billing cycle will affect the costs The advantage of the previous balancing method is that all payments made to the account in the billing cycle will not result in a higher rate.

If this method is being used by your credit card issuer to calculate the finance charges, that the balance will go to the next billing cycle, in essence, your transactions or what you do this month affects the monthly finance charges

This method may be more expensive than other types of financing calculation methods. If the credit card company uses this method, you can minimize the amount you pay in the finance rates of each month by paying more money to your account than the amount you pay within a month.

### Example of finance charges | Previous Balance Method for Calculating Finance Charges

An example of the finance charge calculated using the previous balance method.

APR (annual interest rate) = 14%

Periodic rate = 1.17% (APR / 12 months)

Days in the billing cycle = 30

Initial balance = \$1000

Payment made on 16 = \$100

20-day rate = \$50

End balance =\$ 950

Finance charges = previous balance * periodic rate

= 1000 \$ * .0117

= A finance of \$11.70

## In comparison with the average daily method

A lot of credit card issuers use the average daily balance method to calculate the financial charge.  With this method, the credit card company helps you to record the balance on each day of the billing cycle and then calculates the average of this sum.