The average daily balance method is one of several methods used by credit card companies to calculate interest when a cardholder carries a balance. Cardholders too can use the formula as a way to anticipate interest charges and strategize payments to save money. Unless you’re a total math whiz, you’ll probably want the help of our Average Daily Balance Calculator to make crunching the numbers a breeze.
What Is the Average Daily Balance?
An average daily balance represents the average amount owed by the borrower on any one day of a billing period during which a balance is carried. We don’t recommend carrying balances on credit cards nor applying for credit cards without grace periods. You should be able to avoid interest entirely by paying a credit card bill in full, on time. When you don’t, you’ll need to calculate your average daily balance as part of the math required to figure out how much interest you’ll owe.
How Does Credit Card Interest Work?
An APR, or annual percentage rate, is a big-picture way to indicate the amount of interest you’d owe for carrying a balance from one billing period into the next, without paying it off in full. Talking about interest on an annual basis is good for comparing different credit cards or other types of borrowing, but not compatible with easily understanding how much interest you’ll pay from period to period.
Credit card companies deal with interest much more frequently than once per year. Interest is often calculated daily and, if you do carry a balance, charged each month.
What Is the Average Daily Balance Method?
How do you square these circles and figure out what interest you’ll actually owe? The average daily balance method may not be the only method credit card companies might use to calculate interest, but it’s extremely common. If it’s not indicated on your credit card statement, you can call your issuer to find out exactly how your issuer calculates your interest.
The average daily balance method accounts for your balance on each and every day of the current billing period—in other words, all your “daily balances.” Daily balances include other flat fees you might have incurred through the use of your card, such as a foreign transaction fee or late payment fee—essentially everything you owe the company. To come up with a dollar amount for interest owed via the average daily balance method, your credit card company multiplies your average daily balances by your daily periodic interest rate (your card’s APR, divided by 365).
How Is Average Daily Balance Calculated?
In theory, calculating your average daily balance at any time during the billing cycle is actually pretty simple, if tiresome. Add up your daily balances from the current billing period and divide by the number of days elapsed in the billing period so far. Because your credit card statement won’t typically display daily balance figures, this leaves you the extra step of piecing it together using your transaction records which may not be a particularly fun process.
How Do You Check Your Average Daily Balance?
Your credit card company will make these calculations at the end of your billing period so they can send you a bill and take your hard-spent money plus any interest. You’ll need to get into the weeds yourself if you want to check your average daily balance and your current interest situation at other points during the billing period. This process may be helpful with managing your spending and repayment in a smart, cost-effective way.
We’ve created our Average Daily Balance Calculator to help make this easy. To use it, you’ll simply need to have the following information on hand:
- The start date of your current billing period
- How much balance you’re carrying over from the previous billing period, if any
- How much you’ve charged to your card each day of the current period
- Any payments you’ve already made towards your bill during the current period
You’ll find this information on an up-to-date credit card statement reflective of your current balance. Your transaction records are key in pointing to how much your balance has changed day to day so far during the billing period.
Bottom Line
Credit card interest rates can be intimidating and frustrating to work with, since it’s easy to feel like nothing is quite as simple as it seems. With a little time—and the right tools on hand—cardholders can even be a step ahead of the issuer in determining the level of credit card debt and how much interest it can cost them when carrying a balance.
Frequently Asked Questions (FAQs)
What is a daily balance?
A daily balance is how much a borrower owes to a creditor on any specific day in a billing period. It is an important part of calculating average daily balance. With credit cards, daily balance includes all charges during the current billing period posted and any outstanding balance carried over from previous periods. If the credit card uses compounding interest, this additional interest from the current period is also factored in, as are any flat fees incurred.
Daily balance = (balance carried from previous periods + all charges from current period + value of compounding interest if applicable + flat fees incurred during current period) – payments made during current period
Why is average daily balance important?
Average daily balance is central to determining interest owed if your credit card relies on the average daily balance method and you carry a balance. This method calculates interest using your average daily balance and your daily periodic interest rate, which is closely related to APR. Your average daily balance represents with a single figure what you typically owed per day during your billing period. If you never carry a credit card balance from one billing period to the next, you won’t be charged interest, making your average daily balance and your APR inconsequential.
What is a finance charge?
Much like the term interest, a finance charge represents the cost of accessing credit in all sorts of contexts. The two terms are not interchangeable in the world of personal finance. While interest always takes the form of a rate or percentage, finance charges can include interest rates, flat fees or a combination of the two. With credit cards, a finance charge may be levied even without an outstanding balance, such as with a credit card cash advance that’s paid back in full but still incurs a cash advance fee.
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