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Balance Computation Method for the Finance Charge
Some credit cards try to lure you with offers of a free period. A free period also known as a grace period exempts you from having to pay the finance charges of the credit card by paying the complete balance before the expiry date.
Without a free period or if you intend to pay for purchases over an extended period, you need to know the issuer calculates the finance charge. One way of doing this is the average daily balance. The most common method, it credits your account from the date of the payment receipt by the issuer. The beginning balance for each day of the billing period minus any credits made to your account the same day is totaled for the balance due. The plan determines whether or not new purchases are added to the balance, which typically includes cash advances. The daily balances are then added to the billing cycle and the total divided by the number of days.
Another method is the adjusted balance which is most beneficial for card holders. The balance is worked out by deducting payments and credits received during the period from the previous period’s balance. Purchases are normally not included. Here, you have to pay a part of the balance to avoid interest charges. Sometimes unpaid finance charges from the previous balance are excluded.
Then there is previous balance which is the amount owed in the previous period but usually excluding payments, credits and purchases of the current period.
Two-cycle balance takes into account the previous two month’s activities. Find out if your issuer uses this method and which specific one. Clarify all doubts with your issuer. Your billing statements also must carry an explanation. Credit card info.com reports:
Free Period. Also called a "grace period," a free period lets you avoid finance charges by paying your balance in full before the due date. Knowing whether a card gives you a free period is especially important if you plan to pay your account in full each month. Without a free period, the card issuer may impose a finance charge from the date you use your card or from the date each transaction is posted to your account. If your card includes a free period, the issuer must mail your bill at least 14 days before the due date so you'll have enough time to pay.
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