Previous Balance Method of Calculating Finance Charges

Finance Charge Calculation Using Your Previous Balance

Credit card issuers may calculate finance charges, using one of several different methods. One of them being the previous balance method.

What is the Previous Balance Method?

The previous balance method of calculating your finance charge uses the balance at the beginning of the billing cycle to calculate your finance charge for that billing cycle. That means that none of the activity that happens with your account during that particular billing cycle will affect your finance charge.

The good thing about the previous balance method is that charges to your account made during the billing cycle won't lead to a higher finance charge. The downside is that payments during the billing cycle also won't lower your finance charge.

If your credit card issuer uses the previous balance method to calculate your finance charge, keep in mind that your balance carries over to the next billing cycle, so what you do this month affects your finance charge for next month.

The previous balance method can be more expensive than other types of finance charge calculation methods. If your credit card issuer uses this method, you can minimize the amount you pay in finance charges each month by paying more than you charge during the month.

Previous Balance Method Finance Charge

Here's an example of a finance charge calculated using the previous balance method.

APR = 14%

Periodic rate = 1.17%

Days in billing cycle = 30

Beginning balance = $1000

Payment 16th day = $100

Charge 20th day = $50

Ending balance = $950

Finance charge = Previous balance * periodic rate

= $1000 * .0117

= $11.70

Compared to the Average Daily Balance Method

Many credit card issuers use the average daily balance method to calculate finance charges. With this method, the credit card issuer totals your balance each day of the billing cycle, then calculates the average of that total. If your credit card issuer used the average daily balance method, your finance charge with the same details as the scenario above would be slightly lower at $11.40, assuming you made payments and purchases on the same day of the billing cycle.

What Method Does Your Credit Card Issuer Use

You can find out your credit card issuer's method for calculating finance charges by reading your credit card agreement or the back of your credit card statement. Look for a section called "How We Calculate Your Finance Charge." Contact your credit card issuer if you still have questions about your finance charge.

You can avoid finance charges no matter which method your credit card issuer uses by paying your balance in full each month.