A Consumer-Friendly Way to Calculate Interest
Credit-card holders who carry a balance soon will see a reduction in their finance charges thanks to a new method of figuring interest.
Many credit-card issuers are changing the way that they calculate interest. They're switching from the widely criticized dual-cycle method to the average daily balance method to demonstrate that they can be consumer-friendly -- and to preempt Congress from mandating more drastic changes.
Chase, the second-largest card issuer, switched in January, saying that its action would reduce finance charges for consumers with a balance. Discover Card soon followed suit for some of its credit cards. Bank of America, Capital One and Citigroup all use the average daily balance method.
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With the average daily balance method, your balance at the of each day, minus any credits, is entered and added up. (New purchases may or may not be included, depending on the issuer's policy; check the terms and conditions for this information.) The total is then divided by the number of days in the billing cycle, and the result is the balance on which you owe interest.
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With the dual-cycle method, any month that you carry a balance, the issuer calculates your average daily balance based on the previous month's and the current month's purchases. The difference in the amount of interest you owe could be significant. If you paid $990 of a $1,000 bill in April, leaving a $10 balance in May, you could owe $11 in interest, assuming an interest rate of 13.2% and no new charges. With the average daily balance method, you might owe as little as 11 cents.
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