Question

Explain when EXACTLY you would prefer the previous balance method to the average daily balance including new purchases method in determining your finance charge.

Answer 1

Previous Balance. As the name suggests, this balance is simply the amount you owed at the end of the previous billing period. Payments, credits, or new purchases made during the current billing period are not taken into account. Some creditors also exclude unpaid finance charges in computing this balance.

Average Daily Balance (including or excluding new purchases). The average daily balance method gives you credit for your payment from the day the card issuer receives it. To compute the balance due, the card issuer totals the beginning balance for each day in the billing period and deducts any payments credited to your account that day. New purchases may or may not be added to the balance, depending on the plan, but cash advances typically are added. The resulting daily balances are added up for the billing cycle and the total is then divided by the number of days in the billing period to arrive at the "average daily balance." This is the most common method used by credit card issuers.

It is used exactly for credit card.the previous balance method is favorable to the credit card company and unfavorable to the borrower. This is because, for customers who are working to gradually pay off their debts, this method would not acknowledge the debt repayments that are made during the course of the current month. Instead, the monthly interest will be based only on the balance as of the start of the month, before those repayments are made.