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Calculating Your Credit Balance

If you're someone who occasionally -- or perennially -- carries a balance on your credit card, you probably have a rough idea that your balance is a matter of simple math. You charged some purchases, you paid for some, and you still have some left over.

Credit card companies, however, have a number of ways to calculate your outstanding balance. They'll take that number and multiply it by one month's worth of your current interest rate to figure your monthly finance charges. While it's always important to get the lowest interest rate possible, you don't want to ignore the second factor in this equation.

These are the most common methods credit card issuers use to measure your daily balance:

Average Daily Balance. The Federal Trade Commission calls this the most common method. To figure your balance, the credit card issuer takes the beginning balance for each day in the billing period and subtracts any credits made to your account that day. Each daily balance is added together and then divided by the number of days in the billing cycle to give you the average daily balance. Depending on the credit card issuer, your new purchases may or may not be included if you're carrying a balance. (Most often, they will be.) Typically, cash advances do get included.

If you have a card that uses this calculation method, and you have a balance that you're trying to pay off, you might consider paying as much as you can sooner in the billing cycle rather than later. That can help bring your average daily balance down slightly and lower your finance charges.

Adjusted Balance. This method may resemble the back-of-the-envelope calculations you probably keep in your head. It's also a method that works to the advantage of the card holder, so it might not be easy to find a credit card offering this feature.

When a credit card issuer uses the adjusted balance method, it starts with the balance you had at the end of the previous billing cycle, then subtracts any payments or credits received during the current billing period. Any new purchases you make aren't included. You have until the end of the billing cycle to pay a portion of your balance and avoid interest charges on that amount.

Previous Balance. This method is similar to, but not as advantageous as, the adjusted balance method. It considers your balance the amount you owed at the end of the previous billing period. Any payments and credits made during the current billing cycle get ignored, but your new purchases aren't factored in either.

Two-Cycle Balance. This is a variation on the average daily balance, which can be particularly expensive for some credit card users, especially those who pay their balances in full most of the time but carry a balance once or twice a year.

With this method, the credit card issuer uses the average daily balance method but calculates your balance over two billing cycles instead of one. If you carry a balance, it effectively wipes out the grace period, charging you retroactive interest on your purchases.

To illustrate, let's say you started February with nothing on your credit card until you bought your sweetie an expensive Valentine's Day gift on Feb. 13. When you were billed on Mar. 1, you realized you couldn't pay the whole thing off at once.

Under the regular average daily balance method, your interest on any unpaid portion would start accruing in March. Under two-cycle billing, your average daily balance will be computed using your daily balances in February and March, so you'll effectively pay interest from the moment you purchased your expensive trinket. If you think this seems unfair, you're not alone -- and the confusion that this method causes has led at least one credit card issuer, Chase (NYSE: JPM  ) , to stop using two-cycle billing.

You can find out which method your card uses by looking at your monthly statement. You'll probably find the details somewhere in the fine print on the back. If you can't find it, call the customer service department. You can learn more about the nitty-gritty workings of credit cards in the Credit Center, or by reading these other Foolish articles:

Fool contributor Mary Dalrymple tries to keep her balance when it comes to credit, and she welcomes your feedback. JPMorgan Chase is an Income Investor selection. The Motley Fool has a disclosure policy.


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