How Credit Card Bill's are Calculated
by Ellise Walsh

If you have ever sat down with your monthly credit card statement or statements and tried to calculate how your monthly minimum payment required came to be, it can be difficult enough to give you headache. Many banks that issue credit cards lure consumers in with low introductory rates that suddenly zoom to astronomical highs after that initial trial period is over. Furthermore, there are various fees to take into consideration such as annual membership fees, finances charges, late fees, etc. Not to mention the interest rates that have a tendency to fluctuate. If you have one or more credit cards, all with different fees and varying interest rates it can be almost impossible to figure out a monthly budget for yourself based on what your monthly minimum credit card payments will be.

As distressing and confusing as this can be there is actually a mathematical formula used by financial institutions who issue credit cards in order to determine what your monthly minimum payment will be.

Depending on which method your bank uses, you will either pay a payment based on your average daily balance, your balance based on adjusted payments, charges and interest rates or your previous balance. Each one of these methods has a tendency to favor either the card holder, the card issuer or a fair balance between the two. When you are considering applying for a new card or consolidating your balances, or simply trying to figure out how much money you’re really supposed to pay every month, it is a good idea to read the small print on your card member statement to determine which method that bank utilizes.

The method that is most beneficial to the consumer or cardholder is the adjusted balance system. With this formula the bank will add any new charges to your previous monthly balance, subtract payments and then take that sum and multiply it by the monthly interest charge. The resulting total is the minimum amount you will be required to pay that month.

Conversely, the system that appears to favor the issuer of the card is known as the previous balance system. With this method the financial institution will multiply the balance from the previous month by the monthly interest payment, regardless of any payments you have made since the prior month. This means that even if you have made a large payment that month, you will still be penalized for the previous month’s balance.

Finally, the system that seems to run down the middle is known as the average daily balance method. Your average daily balance (monthly balance divided by average days in the month) is added to any accrued charges as they occur. Any payments that are made are subtracted. The average of each daily total is calculated and that sum is multiplied by the monthly interest rate.

Sound confusing? Factor in late fees, over-the-limit fees and annual membership rates and it becomes even more difficult to calculate a budget when you’re making monthly credit card payments.

As confusing as it is, it is extremely important that you go over every charge on your credit card and calculate the minimum monthly payment due before sending in the payment. Do not take the word of the issuing bank that this is the amount of money that you owe. While the amounts on the statement are generally correct, there could have been a mistake. In case there is an error on your statement, either in charges made or in the amount of your minimum payment, you will normally have only a limited amount of time in which to appeal. After that time limit is exhausted you will generally have no recourse and will be stuck paying the money, regardless of whether you really owe it or not. Most banks allow you 60 days in order to dispute a charge or error and are required to provide you with a reply within 30 days. If the result of the investigation shows that there was indeed an error, you will either not owe the money or receive a credit on your statement. If, however the investigation reveals there was no mistake, you will be responsible for paying the bill. Should you find that you still do not understand, do not hesitate to call customer service and ask them politely to explain it to you. While you will still be required to pay the amounts due, if you understand how the billing system of that company works, it can go a long way toward assisting you in keeping future charges down.



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