Credit card companies have a few ways to calculate interest on credit cards. The method the credit card company uses to calculate interest determines how much interest you have to pay each month. Some ways benefit you, and others benefit the credit card company.

Adjusted Balance

The adjusted-balance method is the most favorable to the consumer. With an adjusted balance, the balance goes down as you make payments during the period, but it doesn't go up as you make purchases during the same period. Therefore, the calculated interest is lower.

Average Daily Balance

In order to calculate the interest using the average daily balance, add the balance each day and then divide this total by the number of days in the period. With this method, the credit card company includes payments and purchases made during the month.

Two-Cycle Average Daily Balance

The two-cycle average daily balance is the same as the average daily balance method, except you add the balance each day for two periods and then divide by the number of days in the two periods.

Previous Balance

When the credit card company uses the previous-balance method, it calculates interest on the balance at the beginning of the billing period. The credit card company doesn't take into account either payments or purchases during the period.

Ending Balance

The ending-balance method is the same as the previous-balance method except that the company applies interest to the balance at the end of the period. With this method, the credit card company does take payments and purchases made during the period into account.

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