Previous Balance Method

What Is the Previous Balance Method?

The term "previous balance method" depicts one of numerous methods for working out interest payments that are utilized by credit card companies. Under the previous balance method, the amount of interest charged every month depends on the balance of debt outstanding on the card as of the beginning of the previous month.

Generally, the previous balance method is great for the credit card company and unfavorable to the borrower. This is on the grounds that, for customers who are working to progressively pay off their debts, this method wouldn't recognize the debt repayments that are made over the span of the current month. All things considered, the month to month interest will be founded exclusively on the balance as of the beginning of the month, before those repayments are made.

Figuring out the Previous Balance Method

Credit card companies have numerous methods to look over while choosing how to compute their cardholders' month to month interest payments. For instance, they could decide to ascertain interest in view of the primary day of the month, the last day of the month, or some average of the two. A few cards even compute interest once every day, and afterward either charge the customer consistently or, in all likelihood toward the month's end.

Depending on the spending and repayment examples of the borrower, different interest calculation methods might be ideal. For example, customers who make partial repayments all through the month on their outstanding credit card debt would almost certainly wish to stay away from the previous balance method. Nonetheless, customers who pay off their whole balance every month would be detached toward the interest calculation method utilized, since they wouldn't wind up paying interest one way or the other.

Sagacious credit card customers will consider the card's interest accounting methodology while settling on which card to acknowledge. All things considered, credit cards will generally offer compromises between different highlights that are wanted by customers, for example, offering a higher annual percentage rate (APR) in exchange for an additional liberal rewards program.

Interest accounting methods are one of the numerous manners by which credit cards can vary, alongside credit limits, account fees, and other such elements.

Aside from the previous balance method, other common methods of interest accounting incorporate the ending balance method, in which month to month interest is charged in view of the balance staying toward the finish of the prior month; the average balance method, where it depends on an average between the beginning and ending balance; and the daily balance, wherein interest is charged every day.

Illustration of the Previous Balance Method

Emma is thinking about choosing another credit card. While inspecting her options, she sees that the cards contrast substantially founded on factors, for example, their approved credit limits, account fees, APRs, reward systems, and, surprisingly, their interest accounting methods.

Emma determines that the main elements for her are that the card has an appealing reward system and no account fees. Since she utilizes her credit card as a "charge card" — paying off the full balance every month — she can bear to acknowledge a card with a higher APR to get the elements she sees as generally important. Likewise, on the grounds that she conveys no outstanding balance from one month to another, she pays no interest on her credit card and is in this way uninterested with regards to its interest accounting method.

Thus, Emma chooses a credit card with a high APR calculated in light of the previous balance method. Since these highlights are ugly to most credit card users, the card offers an extremely liberal reward program and charges no account fees. In the event that Emma didn't utilize her credit card as a charge card, she would probably have preferred a card that calculated its interest payments in view of the ending balance method, so the repayments she makes during the month would be reflected in a decreased month to month interest charge.

Highlights

• The previous balance method is generally viewed as unfortunate according to the viewpoint of the cardholder; different methods, for example, the ending balance method or the average balance method, are frequently preferred.
• It is one of numerous methods utilized with credit card companies.
• The previous balance method is a means of working out the month to month interest payment on a credit card.