Past Due Balance Method

The past due balance method is a system for calculating interest charges based on outstanding loan or credit charges that remain unpaid after a certain date. The past due balance method is typically used by credit card companies and gives card holders until a specified date to pay balances off before beginning to accrue interest fees. If balances are paid by a certain date, no interest is billed. If the balance or a portion of the balance is not paid by the designated date, interest will begin to accrue on the unpaid balance. Not all credit card companies use the past due balance method, and some charge interest from the date a purchase is registered.

With the past due balance method, a credit card holder uses their card for various purchases. At the end of the billing cycle, the credit card company issues a bill that includes charges and purchases from the latest month of activity. Many card companies will then offer a grace period after billing and before the payment due date, typically 21-27 days, when no interest accrues. If the credit card holder pays all or part of the balance within the grace period, no interest will be charged on the amount paid. A credit card interest grace period may not match the due date, and some purchases or cash advances may accrue interest immediately even if there is normally an interest grace period.

With the past due balance method, a credit card user can control how much interest she pays on purchases. For example, Anne has a credit card that closes on the 28th of each month. On the 20th, she purchases several clothing items adding up to $227.13. On the 26th, she purchases a spin bike she finds on sale for $550. At the closing date, Anne's credit card company sends her a bill for 777.13 as she had no current balance. Anne's due date is the 25th, and under her credit card terms, payments received and credited by the end of the 25th will not be billed interest. On the 24th, Anne goes online and makes a $500 payment on her credit card. Beginning on the 26th, she will accrue interest on the remaining balance of $277.13 until she pays it off. The amount of interest that accrues will depend on when the credit card company compounds interest, such as daily or monthly.