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What is an average daily balance?
The average daily balance is used by credit card companies to calculate the amount of interest due on a credit card payment by looking at the balance a customer carries each day of the billing cycle. The average daily balance is calculated by multiplying the daily interest rate by each day’s balance.
The balance of a credit card fluctuates from day to day as the cardholder makes 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. One of these ways is the average daily balance.
To calculate the average daily balance, the credit card company takes the sum of the cardholder’s 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 the card’s annual percentage rate, or APR, to determine interest charges.
The average daily balance is only used for people who haven’t paid off their statement balance on time at the end of the month. Many people will have a grace period during which they can pay the unpaid balance. However, on the first day after the end of the grace period, the credit card company will start charging interest based on the average daily balance.
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Average daily balance example
Kory started the billing cycle with a $100 balance. This would be his daily balance until he makes another purchase or payment. If he makes a $50 purchase on day 5, the daily balance would increase to $150. The rest of his charges look like this:
- 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. Kory divides $7,650 by 30 to get an average daily balance of $255. This is the amount that the credit card company uses to determine his interest charges.
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