Everyone with a credit card knows that they are being charged interest on the balances that they have which are not paid 
off each month. What they might not know is how APR is calculated and how these finance charges are all adding up. Here is an explanation:
Different card companies, different methods. By law you have to be informed by the card issuer how much you are being charged for interest and the method by which they charge your balance.
Fixed or Variable. Some credit card companies charge a fixed rate that does not change very often and the others charge a variable rate which is indexed (attached to) the prime rate plus 2 to 7 additional percentage points at the discretion of the bank.
Methods Used. There are several methods used in determining what balance amount will be charged the periodic rate:
• Adjusted Balance. Your balance is adjusted downward for any payments made during the billing cycle but is not adjusted upward for purchases made in the same cycle. This affords the lowest interest rate, so check the fine print on your cards to find out which one features this method.
• Average Daily Balance. This figure is arrived at by adding the balances on each day of the billing cycle and dividing them by the number of days in the billing cycle. Payments are subtracted and purchases are added.
• Two-Cycle Average Daily Balance. Your account balances on each day of the last two billing cycles are added and then divided by the number of days in the two billing cycles.
• Previous Balance. This is figured by applying the periodic rate to the beginning balance at the beginning of the billing cycle. Payments or purchases do not figure into this method.
• Ending Balance. Payments and purchases are disregarded in this method as the only determining factor is the ending balance at the end of the billing cycle.
Confusing? Yes, but necessary to understand if you are really interested in how the interest rate is applied to your credit card balances. Knowing these details can help you determine which card has the better terms and that can help you avoid paying more in interest.
Be sure to look at all of the rates and fees as well. Search for cards that have the best overall features and benefits for your situation not just the ones with the lowest APR. The other fees and charges might make up for the lower APR and in fact, might make the card more expensive than others. Do your homework first, before you make a choice. You will be glad you did and you will save money in the long run.
When you apply for a card, you should receive a statement which outlines the methods used by that particular card issuer. If not, then contact them to get one sent to you, or move on to the next offer. Remember, you are the one how determines how you spend your money, so pay attention to the details and you’ll pay less.
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