If you are a regular user of credit cards then you must comprehend the basic fundamentals of interest calculations.   You may think that such mathematics is not your cup of tea but then you may find yourself in a soup someday. Credit cards work on the basis of interest that the user pays. As a user you must understand the amount ofinterest you would be required to pay and when. Financial terms are jargons to many people but if you tax your brain a little then it won’t remain a jargon. 

You pay a charge for the money that you owe. This charge is called interest which finally becomes a profit for the money lender. You would not find a lender who allows you interest free credit. You just have the option to understand the credit card’s interest calculations and then use your card accordingly.

Percentage of balance

You must first understand the concept of ‘balance’ and its use to calculate interest. Suppose you and your friend use a credit card to make a purchase of equal value. The same interest rate would be applied to the same bill but it would produce different financial charges for both of you. This is because of the difference in balance.

3 types of balances that determine the financial charge

Adjusted balance

Average daily balance

Previous balance

Adjusted Balance

You may calculate your adjusted balance by subtracting form the previous balance any payments (excluding purchases) made during the current billing cycle.

Average Daily balance

To calculate your average daily balance you would be required to subtract your daily payments from your daily balance on days of the billing cycle. With the results of all the days you would be able to calculate an average daily balance.

Previous Balance

Previous balance is the balance left with you after from the previous billing cycle, before you start a new billing cycle.

Credit Card companies have to let you know the method that they would use to calculate your financial charges. Generally they use the previous balance method and you may also find Credit Card companies using adjusted balance method.

Previous balance method based interest calculations cost the highest financial charges and adjusted balance method produces the lowest financial charges. Hence, you can guess why they use the previous balance method. 

Next time when you use your credit card, make the quick calculations and find out your financial burden. Let not your credit card company rule you, you rule over them, they are not lending you in charity, you are paying for their services.