Previous Balance Method

DEFINITION of 'Previous Balance Method'

A credit card accounting method where interest charges are based on the amount owed at the end of the beginning of the billing cycle. The previous balance method charges interest based on the amount of debt the consumer carries over from the previous billing cycle to the new billing cycle. The cardholder's APR is divided by 12 to determine the monthly interest rate, and the previous balance is multiplied by the monthly interest rate to get the finance charge for the current billing cycle. This method can be more expensive for consumers who are in the process of paying down debt, because payments don't immediately reduce the amount of interest owed.

BREAKING DOWN 'Previous Balance Method'

The interest you owe when you carry a credit card balance can be calculated in different ways and can vary from card to card. The cardholder agreement will state the method your credit card company uses to calculate how much interest is owed. The most common methods are the previous balance method, the daily balance method, the average daily balance method, the adjusted balance method and the ending balance method. If you carry credit card debt, you should choose a card with both a low APR and a favorable method of calculating interest based on your pattern of making purchases and payments.



RELATED TERMS
  1. Average Daily Balance Method

    A credit card accounting method where interest charges are based ...
  2. Credit Card Balance

    The amount of charges, or lack thereof, owed to the credit card ...
  3. Total Finance Charge

    The amount of money a consumer pays for borrowing money on a ...
  4. Billing Statement

    A periodic report that credit card companies issue to credit ...
  5. Past Due Balance Method

    A system for calculating interest charges based on any outstanding ...
  6. Minimum Finance Charge

    The least amount of interest you’ll have to pay your credit card ...
Related Articles
  1. Personal Finance

    Shuffle Away Your Debt With Balance Transfers

    This option can save you big bucks, but only if you watch out for rates and fees.
  2. Personal Finance

    How To Read Loan And Credit Card Agreements

    The devil is always in the details! Find out what you're signing yourself up for.
  3. Personal Finance

    6 Major Credit Card Mistakes

    Avoid these pitfalls to keep your credit score healthy and your debt under control.
  4. Personal Finance

    The Credit Card Balance Transfer Trap

    Before you transfer a balance to a credit card with a lower interest rate, know how it affects new purchases and other fine-print traps that can cost you.
  5. Personal Finance

    Credit Card Or Cash?

    Credit cards are convenient to use, but not always the best choice. Here are 5 times you shouldn't pay with a credit card – and 5 times you should.
  6. Personal Finance

    Credit, Debit And Charge: Sizing Up The Cards In Your Wallet

    Not all plastic is equal! Learn the difference between the three kinds, and how each can affect your finances.
  7. Investing

    Cut Credit Card Bills By Negotiating A Lower APR

    Reducing the rate charged on your credit card balance is the first step to getting out of debt.
  8. Markets

    The Fed's Interest Rate Rise & Your Credit Cards

    The U.S. Federal Reserve recently raised the lending rate from 0% to 0.25% – the first time since 2006. How does that affect your credit card payments?
  9. Personal Finance

    Don't Get Burned by High Credit Card Rates

    The average card charges 11.8%, and some rates top 20%. Experts warn that credit card interest may remain steep.
  10. Investing

    Should You Use Credit Cards To Fund Your Business?

    We give you 4 reasons to consider using a credit card instead of a business loan to fund your business, and how to be smart about it.
RELATED FAQS
  1. How is interest charged on most lines of credit?

    Learn how most financial institutions calculate interest on lines of credit by using the average daily balance method and ... Read Answer >>
  2. I have 3 credit card debts, how can I get them paid off the cheapest way?

  3. Because I missed a few credit card payments, the issuer raised my interest rate from ...

    You should first check that your credit card company is operating within your rights as a card holder. The U.S. Congress ... Read Answer >>
  4. What's the difference between a balance transfer and a cash advance?

    Learn how balance transfers and cash advances differ, how these transactions can both benefit and hurt your finances, and ... Read Answer >>
  5. How do I check the balance on my prepaid credit card?

    Check your prepaid credit card balance quickly using your phone or the Internet. Keeping track of your balance is easy and ... Read Answer >>
  6. What are some common models that practitioners use in quantitative analysis of equity ...

    Understand which aspects of a credit card agreement make accepting a new credit card offer a good deal or one that should ... Read Answer >>
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  3. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  4. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  5. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  6. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
Trading Center