What Is the Previous Balance Method?

The previous balance method describes a credit card accounting method where interest charges are based on the amount owed at the beginning of cycle. The previous balance method is one of the least common interest charging methods.

When the previous balance method is used, interest is charged based on the amount of debt the consumer had at the beginning of the billing cycle. The cardholder's annual percentage rate (APR) is divided by 12 to determine a monthly interest rate. Then the previous balance is multiplied by the monthly interest rate to get the interest charge for the billing cycle. This method can be more expensive for consumers who are in the process of paying down debt because any payments made during the billing cycle will not reduce the amount of interest owed.

Key Takeaways

  • The previous balance method charges interest based on the outstanding balance at the beginning of a billing cycle.
  • The previous balance method is one of the least common interest charging methodologies.
  • The previous balance method does not consider any activity that takes place during a billing cycle.

Understanding the Previous Balance Method

Credit card companies can choose from several different accounting methods when assessing interest on outstanding credit card debt. Thus, the interest you are charged when you carry a credit card balance may be different for each credit card you have. The cardholder agreement will state the method your credit card company uses to calculate how much interest is owed.

Methods for charging interest may include:

  • Previous balance: Monthly interest charged on beginning balance.
  • Ending balance (also known as adjusted balance): Monthly interest charged on ending balance.
  • Average balance: Monthly interest based on some average, usually the beginning and ending.
  • Daily balance: Interest is charged each day on the balance. Interest may accumulate daily or be charged all at once at the end of the billing cycle.
  • Average daily balance: Interest is charged at the end of the billing cycle. Interest is equal to the APR divided by 365, times the number of days in the billing cycle, times the average daily balance.

Savvy credit card users will consider a card’s interest accounting methodology before accepting a card offer. The best choice will be a card with a low APR and a favorable method of calculating interest based on your pattern of making purchases and payments.

Previous Balance Interest

The previous balance method is not common since it does not account for any of the activity that occurs during the billing cycle. When the previous balance method is used, the credit card company assesses interest based on the balance at the beginning of the cycle. The APR is divided by 12. Interest charges are then added based on a monthly APR.

The previous balance method is usually mostly beneficial to the credit card company. If a cardholder is paying down their debt, the previous balance method allows the company to earn more interest by delaying the acknowledgement of card payments. This leaves the card company with more interest on the higher balance that is shown at the beginning of the cycle.

It can be important for a cardholder to be aware that a previous balance method is used. This method can lead to different activity. Overall, charges made to an account during the billing cycle aren’t charged interest unless they are carried over. Thus, if a cardholder wants to avoid interest, they should time their purchases and payments to be made before the new beginning balance occurs.