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U R @: Education Center : Understanding the Fine Print : Grace Periods and Balance Computation Methods: Know How to Trim Interest Costs
GRACE PERIODS AND BALANCE COMPUTATION METHODS: KNOW HOW TO TRIM INTEREST COSTS
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. However, not all credit cards calculate interest in the same way. Depending on the card you hold, you will either be charged interest according to the Average Daily Balance Method or the Two-Cycle Average Daily Balance Method.
The Average Daily Balance Method is the most straightforward and consumer friendly. By this method, interest is calculated based on your average balance during the most recent billing cycle. PPPP The Two-Cycle Method is 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, new credit card laws will ban double cycle billing, so this issue will become moot in February of 2010. Until then, however, review credit card applications carefully to avoid extra interest charges.
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