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 offinance 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.
If the average daily balance method is used, the funding charge with the same data as in the previous scenario would be slightly less than $ 1.40, assuming you made the payment and purchases on the same day of the billing cycle.
Know themethod that is being used by your credit card.
Read the credit card statement sent to you to be familiar with the method used by your credit card to calculate your financial charges. Look for the “How to calculate the financing fee” section. Contact the credit card company if you still have questions about the tax on finance or calculations.
Avoid finance charges regardless of the method used by paying the total balance of your credit card monthly.