How Your Balance Is Calculated

Another important thing to keep in mind is the way banks calculate your balance on the card. There are several computational methods, and banks usually use those that are not in the debtor’s favor.

Here are the most popular ones:

Average Daily Balances Including New Transactions
Using this method, banks add up your balance from each day and then divide the total by the number of days in the billing period. They deduct payments and credits and include new transactions into the calculation.

This method is the most common and you can safely accept it if all other requirements for the card are what you are looking for.

Two-Cycle Average Daily Balance Including New Transactions
This method would be applied by some banks if you did not pay your previous balance in full. Two-cycle average simply means that the bank will add the previous billing cycle financial charges to the current billing cycle charges, which will increase the average daily balance.

I would recommend avoiding a card which implements this method, even if it offers a very attractive APR.

Adjusted Balance
This method takes your balance at the beginning of the billing period and subtracts all credits and payments. The interest is charged on the remaining balance. New transactions are usually not included.

This would be the most preferable calculation method for the cardholder but unfortunately is seen very rarely these days.

I know it is boring, but that is what we have to know to take advantage of the cards rather than becoming a victim of them.

Now let me show you how to calculate your real or effective APR on your current credit card. By saying “real” or “effective,” I mean the annual percentage rate you are actually paying for the credit, not that advertised APR you see when you get a credit card offer.

How To Calculate Your Current Card APR

This is pretty easy. Get your last statement in front of you and do the following:

Financial Charge / New Balance * 12 * 100 = Effective APR
For example, your financial charge is $12.50, and your new balance is $1956.12.

$12.50 / $1956.12 * 12 * 100 = 7.67% is your effective credit card APR.

How To Calculate Your Credit Card Pre-approved Offer APR

Pre-approved credit card offers can be very enticing; however, my advice is not to let anyone convert you into an impulsive buyer, especially with finance-related long term products. If you decide that you need a card and you want to evaluate an offer, make sure you read the terms and conditions first, including the card’s fine print.

It is kind of funny or may be even unethical, but the most important information is in the fine print. Anyway, to calculate an APR, we need to clearly see and write down all card fees. These can include an annual fee, a card member fee, a balance transfer fee, a minimum finance charge, etc.

After you’ve found out all the credit card fees and charges, it is time to evaluate them according to your plans for this particular card.

Let’s say you are looking for a card with 0% APR on balance transfers to get your $3,000 balance off the high interest credit card. In this case, a direct question related to the APR is: What balance transfer fee is this card charging, if any? Usually it is around 3%, without a maximum restriction.

Let’s make our calculations.

1. Balance Transfer Fee + All Other Charges * 12 Months = Total Fees
2. Total Fees * 100 / Balance Amount = Effective APR

Balance Transfer Fee = $3,000 * 3% = $90
Minimum Finance Charge = $0.50

1. $90 + $0.50 * 12 months = $96
2. $96 * 100 / $3000 = 3.2%

As you can see, your effective APR in this case is 3.2%, not what you might think when you’ve seen a big 0% APR printed on the offer.

It is not rocket science to calculate your credit card APR, and it requires almost no effort to evaluate a credit card offer. If you do it the proper way, you will get the best card for your needs without any surprises in the future.