Average Daily Balance
Average Daily Balance is a method used by credit card issuers to calculate interest charges, based on the average amount owed each day during a billing cycle. This is evaluated within Credit Card Mechanics.
Plain-Language Meaning
This term refers to the average amount of money you owe on your credit card each day over a billing period, which is then used to determine how much interest you are charged.
Practical Example
If you carry a balance on your credit card and make payments or new purchases throughout the month, the issuer adds up your balance for each day, divides by the number of days in the billing cycle, and uses that average to calculate your interest charges.
What It Does Not Mean
Average Daily Balance does not refer to the highest or lowest balance you had during the month, nor does it mean the balance at the end of the billing cycle.
How It’s Calculated
The system adds up your credit card balance at the end of each day in the billing cycle, then divides that total by the number of days in the cycle to find the average. This average is then used to determine the interest owed for that period.
Common Misconceptions
- “Interest is only charged on the balance at the end of the month.” Interest is calculated on the average daily balance, not just the ending balance.
- “Making a payment right before the due date eliminates all interest.” Payments affect the average daily balance, so earlier payments can reduce interest more effectively.
- “Purchases made late in the cycle don’t impact interest charges.” Any balance carried during the cycle, regardless of when it was added, contributes to the average daily balance.
Related Pages
Related Glossary Terms
FAQ
- How does the average daily balance method affect my interest charges? The average daily balance method means that both your payments and new purchases throughout the billing cycle influence the amount of interest you are charged, as the system averages your balance over the entire period.
- Is the average daily balance method used by all credit card issuers? While it is a common method, not all issuers use the average daily balance method; some may use other calculation methods for interest.