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Average Daily Balance |
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The Daily Average Balance is one of the three most common methods that credit card issuers use to calculate the amount of interest they charge on your credit card balance. The other methods are called the "previous balance method" and the "adjusted balance method." Of the three, the Average Daily Balance method costs you the most in interest charges.
How The Average Daily Balance is Calculated
The card issuer adds together your balance for each day and then divides it by the number of days in the month.
For example:
Let's say that for each day from January 1st through January 15th, you make a $10 purchase. Then, on January 16th you make a $1,000 purchase. You make no more purchases for that month. You average daily balance would be $38.33.
That amount is then multiplied by a constant factor which determines your interest charge. The end result works out to be the same as if the card issuer had charged you interest on your balance at the end of each business day.
A variation of the Average Daily Balance method is called the Two-Cycle Average Daily Balance Method which calculates the daily balance over the two previous billing cycles.
Make sure that you understand how interest is charged on your card and what it really costs you to use it.
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Credit Card Definitions > A - E > Average Daily Balance
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