Navigating your way through all the different types of finances charges can be complicated. There’s your average daily balance, adjusted balance, previous balance, and two-cycle average daily balance. Your finances charges are based on the lenders APR (Annual Percentage Rate). The cost of credit isn’t only determined by your interest rate, but also how your lender is calculating the fees. Here are the common types of balance calculation methods:
1) Average Daily Balance — This is perhaps the most common calculation method. Your creditor will credit your account from the day a payment was received. To figure out the balance that your lender will base your interest charges on, they will take the average daily balance and divide it by the number of days in the billing period.
2) Adjusted Balance- This form of calculation is the most advantageous for card members. Your interest charges are based on subtracting payments received during your current billing cycle from the balance at the end of the previous billing period. Purchases made during the billing period are not included.
3) Previous Balance- This is one of the least advantageous methods because finances charges are based on the amount owed at the end of the last billing cycle. It doesn’t take into consideration any payments that you have made.
4) Two-Cycle Average Daily Balance- The two-cycle average daily balance calculates your finances charges for one billing cycle based on the average balance over two billing cycles.
Your creditor doesn’t just make money off the interest rates. There are other fees that you should be aware of, often called nuisance fees. Some of these include:
1) Transaction Fees- Card issuers might charge you a 2-3% transaction fee for the amount you purchased. This may be the case for cardholders who pay off their balance in full every month, who are also called “deadbeats” of the industry.
2) Late Fees- The average late fee is about $35. If you miss a payment, creditors can increase your interest rate without notice. It’s important to keep an eye on the due date so this doesn’t happen.
3) Over the Limit Fees- If you keep a balance over your credit limit, some creditors might charge you a fee. Creditors will force you to bring your account to your credit limit by forcing you to pay the difference in addition to the minimum payment that’s due.
4) Annual Fees- Some creditors charge an annual membership fee that ranges anywhere from $25 to $50. Sometimes these fees can go in excess of $450/year.
5) Cash Advance Fees- Using a cash advance can be dangerous. Not only are the interest rates in the high 20’s, but your payments are applied to the standard purchase first before being applied to the cash advance purchases.