Four Different Balance Computation Methods to Understand

There are a lot of different things that you are going to want to take into consideration before you make a balance transfer. You will want to consider the length of time for the low interest rate on the transfer, the rate of the balance transaction fee and the amount that you will be allowed to transfer. You probably already know these things. But did you know that you should also take a close look at how the balance is computed before you decide that a balance transfer is a smart thing to do?

Here are four different methods of balance computation that you should be aware of:

1. Average Daily Balance. This average daily balance method is the most common type of computation that is used for computing the interest on balances. It means that your account is credited with the payment that you send as soon as it is received by the credit card company and the same is true of transactions. Your balance is computed at the end of each day. At the end of the month, the average of these balances is calculated. That is how the balance is figured out. If you get a balance transfer offer with this type of computation then it’s probably fine to go ahead and make the transfer.

2. Adjusted Balance. This computation method determines the monthly balance for the card by starting with the balance on the card at the beginning of the month and then subtracting out any payments made during the month. This usually results in the lowest interest charged to the card holder and it is an ideal choice for a balance transfer offer.

3. Previous Balance. This type of computation is based solely on the amount owed at the end of the previous month and does not take into consideration any payments or transactions that were made. This could be an advantage during a balance transfer but that depends on the cards being transferred to and from as well as on the other details of the balance transfer offer.

4. Two-Cycle Balances. There are a whole variety of different balance computation methods that use information from two billing cycles (the current one and the one previous to it) to determine what the balance is that interest is going to be charged on. These methods are usually not favorable in the case of the balance transfer offer although again this is going to depend on the specifics of the card offer.

The balance computation method used by your credit card companies is just one thing that you are going to want to take into consideration when doing a balance transfer. You will want to look at the computation methods of both the credit card that you are interested in transferring the balance to and the credit card that you want to transfer the balance from. In most cases, this isn’t going to be a deciding factor as to whether or not you should complete the balance transfer transaction but it is one of those things that is good to be aware of as you make your financial decisions.

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This entry was posted on Thursday, August 7th, 2008 at 8:21 am and is filed under Debt & Consolidation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.