Past Due Balance Method

Abby usually pays off her credit card in full every month, but this last month sure was a doozy. She bought her plane ticket home for the holidays, her car broke down and needed a repair, and then there was the whole incident with the quiche and the chandelier that ended up being quite costly. There’s no way she’s going to be able to pay that off all at once, so being the smart credit consumer that she is, she takes a moment out of her busy day to check out her card’s past due balance method.

The “past due balance method” is how a credit card company calculates interest charges based on our unpaid balance. Let’s say Abby put $4,200 on her credit card last month, and that the card’s billing cycle ends on the first of the month. She then has a 15-day grace period to make a payment without accruing interest. After 15 days, a 19.99% interest rate is assessed on the remaining balance. Now that she’s armed with this information, she can calculate how much she’s going to owe in interest based on how much of that $4,200 she can pay off by the 15th. She figures that, if she eats nothing but ramen for two weeks—she’s sworn off quiche anyway—then she can probably put $2,000 toward the card this month. That leaves a $2,200 balance, so at 19.99% interest rate that is compounded monthly, she’ll end up owing an extra $36.15 next month. If she can somehow swing paying $2,500 this month, then she’ll only be charged $27.93 in interest next month.

There are a few things to note about past due balance methods: different credit cards use different methods. There are a bajillion factors that go into determining our own past due interest charges: how soon after purchases does our card start charging interest? What’s the interest rate? How often is it compounded? How long is our grace period? Knowing stuff like this about the cards in our wallet can help us have a much higher degree of financial control…and can help us figure out if we need to start looking for a credit card that better fits our needs.