What is the average daily balance method

New purchases may or may not be added to the balance, depending on the plan, but cash advances are added. The daily balances are summed for the billing cycle, and the total is then divided by the number of days in the billing period.

The result is the "average daily balance. And, if you carry a balance from last month, you don't have a grace period on anything that month.

You're charged interest from the first day you buy an item. The Adjusted Balance Method takes into account payments you've made but not new purchases. Yet, on the following day, after the grace period expires, the credit card issuer most likely will start to charge interest based on the average daily balance.

Your average daily balance is the total of your balance per day in the billing cycle divided by the number of days in the billing cycle. Moreover, the average daily balance method for calculating finance charge takes your total balance during the billing cycle then multiplies it by the annual percentage rate APR for the said balance. Your daily balance for each day during the billing cycle would look like this:. To determine your average daily balance, you need to sum up your daily balances in the billing cycle and divide it by the total number of days in the billing cycle, which in this case is The average daily method is known to be less expensive than the other methods out there.

To know more about other methods used in calculating finance charges, here are some of the most common:. With the adjusted balance method, the interest charges are based on the sum owed at the end of the current billing cycle after payments and credits have been posted. With the previous balance method, the interest charges depend upon the sum you owed at the end of the beginning of the billing cycle.

Table of Contents Expand. Table of Contents. Average Daily Balance. Average Daily Balance Finance Charge. Why Does the Billing Cycle Matter? By LaToya Irby. LaToya Irby is a credit expert who has been covering credit and debt management for The Balance for more than a dozen years. Learn about our editorial policies. Reviewed by Thomas J. Article Reviewed October 18, Thomas J.

Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities. Learn about our Financial Review Board.

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