How creditcard bill's are calculated

 

Written By Ellise Walsh

Tue 3/8/2005 10:38 AM

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 favour 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.