Average daily balance

What is an average daily balance?

The average daily balance is calculated by adding each day’s balance and dividing by the number of days in the billing cycle. This is the method that credit card companies use to calculate the payment due.

Deeper definition

The balance of a credit card fluctuates from day to day as you make purchases and payments on the account. The credit card company needs a way to determine how much to charge in interest at the end of the billing cycle. Thus, the company uses the average daily balance.

To calculate the average daily balance, the credit card company takes the sum of your balances at the end of each day in the billing cycle and divides that amount by the total number of days in the billing cycle. Then, the company multiplies this figure by your annual percentage rate, or APR, to determine interest charges.

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Average daily balance example

To calculate the average daily balance on your credit card, keep track of your balance at the end of each day. While the credit card company doesn’t list the balance each day on your statement, you can use the record of your transactions to calculate it yourself.

For example, if you started the billing cycle with a $100 balance, this would be your daily balance until you make another purchase (or payment). If you made a $50 purchase on day 5, the daily balance would increase to $150 until you make another purchase. Consider this example:

  • Day 1: $100 (balance).
  • Day 5: $50 (charge).
  • Day 15: $200 (charge).
  • Day 20: $50 (charge).

By adding the balance of Day 1, Day 2, Day 3, and so on, the total would be $7,650 for the entire 30-day billing cycle. Divide $7,650 by 30 to get an average daily balance of $255. This is the amount that the credit card company uses to determine your interest charges.

Are you trying to pay off a credit card? Find out how long it will take with Bankrate’s credit card minimum payment calculator.

 

 

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