I’ve been using credit cards so many years, and I didn’t know how banks charge interest on the balance very well. Recently I found this crazy trick, and I couldn’t help writing about this.

This is a copy from my last month credit card.

Previous Balance $1,086.15
Payment, Credits -$1,300.00
Purchases +$1,157.39
Interest Charged +$18.84
New Balance $962.38

Did you notice something funny here?
I paid more than “Previous Balance”, and they charged me “18.84”.
I wondered why, and investigated.
This is what I found out.

The last month payment due was 10/18/2010. So I paid $1000 before 10/18/2010. And I got some cash after that, so I paid another $300 on 10/20/2010 which was after the due date. So the bank considered I didn’t pay off the whole amount by the due date. That’s fine. I knew it. So I thought they would charge the interest only for the left over which is $86.15 ($1086.15-$1000=$86.15). I was wrong. They use this mysterious method, called “average daily balance method”, to calculate balance subject to interest rate. So the balance subject to interest rate was $783.79. I don’t know exactly how this number came up. But obviously, it’s way more than just the left over $86.15.

Here is what I learned. When you use a credit card, PAY IT OFF EVERY MONTH!!! Don’t leave even $1, because they will add the current billing cycle balance somehow, and charge some interest.

But anyway, how did this amount "$783.79" come up?