Average Daily Balance Method

What is an average daily balance?

The average daily balance is utilized with credit card companies to work out the amount of interest due on a credit card payment by taking a gander at the balance a customer conveys every day of the billing cycle. The average daily balance is calculated by increasing the daily interest rate by every day's balance.

More profound definition

The balance of a credit card varies from one day to another as the cardholder makes purchases and payments on the account. The credit card company needs a method for deciding the amount to charge in interest toward the finish of the billing cycle. One of these ways is the average daily balance.
To work out the average daily balance, the credit card company takes the sum of the cardholder's balances toward the finish of every day in the billing cycle and partitions that amount by the total number of days in the billing cycle. Then, the company increases this figure by the card's annual percentage rate, or APR, to decide interest charges.
The average daily balance is just utilized for individuals who haven't paid off their statement balance on time toward the month's end. Many individuals will have a grace period during which they can pay the unpaid balance. Nonetheless, on the principal day after the finish of the grace period, the credit card company will begin charging interest in light of the average daily balance.

Average daily balance model

Kory began the billing cycle with a $100 balance. This would be his daily balance until he makes another purchase or payment. On the off chance that he makes a $50 purchase on day 5, the daily balance would increase to $150. His other charges seem to be this:

• Day 1: $100 (balance).
• Day 5: $50 (charge).
• Day 15: $200 (charge).
• Day 20: $50 (charge).

By adding the balance of Day 1, Day 2, Day 3, etc, the total would be $7,650 for the whole 30-day billing cycle. Kory partitions $7,650 by 30 to get an average daily balance of $255. This is the amount that the credit card company utilizations to decide his interest charges.

Features

• Interest charges are calculated utilizing the total amount due toward the finish of every day.
• The average daily balance credits a customer's account from the day the credit card company gets a payment.
• Interest charges utilizing the average daily balance method ought to be lower than the previous balance method and higher than the more uncommon adjusted balance method.