When you use your credit card, your purchases do not immediately begin accruing interest.  In fact, you are not charged interest for anywhere between twenty to twenty five days.  This interest reprieve is known as a grace period, and applies to consumers who pay their new balance in full each billing period. If you do not pay your balance in full each month, however, you will be subject to interest charges. 

Thanks to the CARD Act, credit card companies now use the Average Daily Balance Method to compute interest.  By this method, interest is calculated based on your average balance during the most recent billing cycle.

Prior to the CARD Act, some companies utlized the Two-Cycle Method, which was not quite as consumer friendly, as it averages the balance from two billing cycles.  For example, if you have an average daily balance of $10,000 in March and, after paying your card off, $0 in April, you will be charged interest on an average daily balance of $5000 at the end of your April billing statement. 

Clearly, the Average Daily Balance Method provides much better value to consumers, as you will not be “penalized” for having carried a high balance during the previous billing period.

Fortunately, the new credit card laws banned the double cycle billing, Nevertheless, it is still important to review credit card applications carefully to avoid extra interest charges and find a card with a long grace period.