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. Past Due Balance Method

    A system for calculating interest charges based on any outstanding ...
  5. Double-Cycle Billing

    A method used by creditors, usually credit card companies, to ...
  6. New Balance

    The new balance is the sum of your previous balance, payments, ...
Related Articles
  1. Personal Finance

    Everything You Need To Know About Credit Card Rates

    Understanding credit card rates will help you choose the right credit card, and avoid any unpleasant surprises.
  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

    How to Pay Off Credit Card Debt This Year

    When you look at the numbers, debt seems to have become an American way of life.
  4. Personal Finance

    6 Major Credit Card Mistakes

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

    The Pros And Cons Of Balance Transfers

    Do the math before you assume that transferring your credit card balance to a lower rate card will save money. It could – or it could cost you.
  7. Personal Finance

    Why Making Minimum Payments Gets You Nowhere

    Getting out of debt can be difficult, but paying off a minimum balance each month only makes things worse.
RELATED FAQS
  1. Are balance transfers worth it?

    Balance transfers on credit cards are often a way to save a lot of money over the short and medium term. Read Answer >>
  2. How is the minimum payment on a credit card calculated?

    Even when minimum payments are low, consumers should still aim to pay off credit card balances every month. Read Answer >>
  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 >>
Hot Definitions
  1. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  2. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  3. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
  4. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  5. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
  6. Merchandising

    Merchandising is any act of promoting goods or services for retail sale, including marketing strategies, display design and ...
Trading Center