Average Daily Balance Method

The average daily balance method is a common way to calculate interest on a credit card. It is calculated by adding up the daily balances on your account for the billing period and then dividing by the number of days in the period. The interest rate is then applied to this average daily balance to determine the amount of interest you will be charged.

There are a few things to keep in mind when using the average daily balance method. First, it is important to understand that the daily balances used to calculate your interest are not the same as the balances that appear on your monthly statement. The daily balances are calculated using the closing balance from the previous day and any new transactions that are posted to your account during the day. This means that if you make a large purchase on the day before your statement is generated, it will have a significant impact on your average daily balance and the amount of interest you will be charged.

Second, the average daily balance method can be very unforgiving if you make late payments. If you have a balance on your account at the end of the billing period and you do not make a payment by the due date, your account will be charged a late fee. This late fee will be added to your balance and will be included in the calculation of your average daily balance for the next billing period. This can lead to a vicious cycle of late fees and high interest charges.

If you are concerned about the impact of the average daily balance method on your credit card bill, there are a few things you can do. First, try to keep your credit card balances as low as possible. This will reduce the amount of interest you will be charged. Second, make your payments on time. This will help you avoid late fees and keep your average daily balance down. Finally, consider using a credit card that offers a grace period. This is a period of time, usually 20 to 25 days, during which you can make a payment without being charged interest.