# Financial Literacy

The Balances Used to Calculate Your Interest

# The Balances Used to Calculate Your Interest

1. The month’s beginning balance is carried over from last month’s ending balance.
3. Subtract the payments you’ve made.
4. Ta-da! You get the Adjusted Balance.

Credit card companies don’t like to use this method because you get to deduct your payments before interest is charged, which means they get less money from you.

Previous Balance

Some credit card companies use your balance at the end of the past month to calculate interest. This is to your disadvantage because your balance is highest right before you make a payment.

Average Daily Balance

The average daily balance method is the most common way credit card companies charge interest. They look at all the charges you’ve made in a month and use those to calculate a weighted average daily balance.

 Calculating your average daily balance Beginning balance \$3,000 You charge \$200 on the 26th day of the month \$200 Calculate a weighted average based on these amounts and days Daily Balance # of Days Extended Days with a \$3,000 balance \$3,000 25 \$75,000 Days with a \$3,200 balance (\$3,000 plus the new \$200) \$3,200 5 \$16,000 \$91,000 total Divide by the numbers of days in the billing cycle 30 Average daily balance \$3,033 Monthly interest rate 1.5% Finance charge \$45.50

Then they charge interest based on that average balance. Like, for Clive Clueless, his interest is 18% a year or 1½% a month (0.18 divided by 0.12 = .015), so he would pay \$45.50 a month if he hasn’t sweated profusely enough yet to get his balance down to a more manageable level.

It’s better to choose a card that does not charge interest daily because then you wind up paying interest on interest and those daily amounts can add up to big bucks.