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 can use the formula 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 the borrower owes on any one day of a billing period during which a balance is carried. Daily balances include your charges or purchases and credits, refunds or payments when applicable. They also include other fees you might have incurred through using your card, such as a foreign transaction fee or late payment fee. Essentially, it’s a running look at everything you owe the company.
We don’t recommend carrying balances on credit cards or applying for credit cards without grace periods. You can avoid paying interest by paying your credit card bill in full and on time. When you don’t, you can calculate your average daily balance as part of the math required to determine 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. Credit card interest may be calculated as often as daily, with card interest charged monthly if you carry a balance.
When Is Credit Card Interest Calculated for the Average Daily Balance Method?
Although your card issuer will consider every day’s balance when calculating the average daily balance method, the calculation is only done once per billing statement if you carry a balance. At that time, the issuer will calculate your monthly interest and add it to your billing statement.
What Is the Average Daily Balance Method?
The average daily balance method accounts for your credit card balance on each day of the current billing period—in other words, all your “daily balances.” To determine 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).
The average daily balance method may not be the only method credit card companies 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.
How To Calculate Average Daily Balance
In theory, calculating your average daily balance during the billing cycle is 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, you’ll have the extra step of piecing it together using your transaction records, which may not be a particularly fun process.
Your calculation will look like this:
(day 1 balance + day 2 balance + day 3 balance + … day 30 balance) / Number of days in billing cycle
For example, if you charged $50 to your credit card on the first day of a 30-day billing period, made a $250 charge on the 5th day (bringing your combined balance to $300) and made another $200 charge on the 20th (for a $500 total balance), the total of your daily balances would be $9,750. That’s a $50 balance each on days 1 to 5, $300 on days 6 to 20 and $500 on days 21 to 30. You then divide your average daily balance by the number of days in your billing period—in this case 30—to calculate an average daily balance of $325.
How Do You Check Your Average Daily Balance?
Your credit card company will make these calculations at the end of your billing period to send you a bill and collect what you owe 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:
- The start date of your current billing period
- How much balance you’re carrying over from the previous billing period
- How much you’ve charged to your card each day of the current period
- Any payments you’ve already made toward 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 daily 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—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 the average daily balance. With credit cards, the daily balance includes all posted charges during the current billing period 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). This method calculates interest using your average daily balance and your daily periodic interest rate, which is closely related to APR. 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.
How is the daily balance method different from compounding interest daily?
Daily compounding is when today’s balance accrues interest and then, tomorrow, that new balance accrues more interest and so on. Therefore, a card that compounds interest daily will calculate what you owe based on the exact balance of a specific day rather than looking at an average balance throughout a billing period. Overall, what you owe may vary based on which method is used to calculate interest.
