What method is used to calculate your balance?

Average Daily Balance Method for Calculating Your Balance

The average daily balance method is the most common method used to calculate finance charges on revolving accounts, such as credit cards and lines of credit. It takes into account the balance at the end of each day during a billing cycle to determine the average daily balance. This balance is then multiplied by the periodic interest rate to calculate the finance charges.

The average daily balance method is calculated as follows:

1. Add up the daily balances for the billing cycle. This is the total of the balances at the end of each day during the billing cycle.
2. Divide the total by the number of days in the billing cycle. This gives you the average daily balance.
3. Multiply the average daily balance by the periodic interest rate. This gives you the finance charges.

For example, if you have a credit card with a billing cycle that runs from the 1st of the month to the 31st of the month, and your daily balances are as follows:

• 1st: $100
• 2nd: $120
• 3rd: $140
• 4th: $160
• 5th: $180
• 6th: $200
• 7th: $220
• 8th: $240
• 9th: $260
• 10th: $280
• 11th: $300
• 12th: $320
• 13th: $340
• 14th: $360
• 15th: $380
• 16th: $400
• 17th: $420
• 18th: $440
• 19th: $460
• 20th: $480
• 21st: $500
• 22nd: $520
• 23rd: $540
• 24th: $560
• 25th: $580
• 26th: $600
• 27th: $620
• 28th: $640
• 29th: $660
• 30th: $680
• 31st: $700

Your total daily balances for the billing cycle would be $21,000. There are 31 days in the billing cycle, so your average daily balance would be $21,000 / 31 = $677.42.

If your periodic interest rate is 1.5%, your finance charges would be $677.42 * 0.015 = $10.16.

The average daily balance method is a fair and accurate way to calculate finance charges. It takes into account the actual balance on your account each day, so you are only charged interest on the money you actually owe.