How Credit Card Interest is Calculated - Credit 101 Series

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How Credit Card Interest is Calculated - Credit 101 Series

Credit card interest charges (aka finance charges) are usually calculated using the average daily balance method. The average daily balance method calculates your credit card balance on a daily basis during normal billing cycle and then adds the daily balances together.  Finally, the total of the daily balances is divided by the number of days in your billing cycle to give you the average daily balance.

A controversial method of calculating interest charges is called two-cycle or double cycle billing. Be wary of cards that use this method. Cards using this method calculate interest on your average daily balance over the current and the previous billing period (hence the name two-cycle), instead of on the average daily balance for just the current billing period.

With two-cycle billing, you usually end up paying considerably more in interest, especially if you occasionally carry a balance. If your carry a balance from month to month, the impact is much more negligible.  

The good news is that, because of political and media pressure, Chase abandoned this practice in early 2007. As of today, the vast majority of card issuers use the average daily balance method. Moreover, the new Credit Card Accountability, Responsibility and Disclosure (CARD) Act that was signed into law in May, 2009 has outlawed double cycle billing. The provision of the CARD Act pertaining to double cycle billing will go into effect in February, 2010.

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