How is average daily balance calculated?

The Average Daily Balance, is the average amount that exists in an account over a period of time, the period of time is typically a billing cycle. The average daily balance is calculated by adding the daily balances over a period of time and dividing by the total number of days in that period. This calculation method is used to calculate interest.

The Average Daily Balance and Credit Cards

The average daily balance method is commonly used by credit card companies. This value is used with your APR to determine finance charges. Therefore, it is important to know how this calculation works because it may impact how you use your credit card. Credit card companies calculate your average daily balance by adding your daily balance for each day of the billing cycle then dividing it by the amount of days in the billing cycle. For example, if you spent 30 dollars consistently for a month or for every day in your billing cycle, to calculate your average daily balance you would take the sum of spending 30 dollars for 31 days and divide it by 31, the number of days in the billing cycle.

Sum of money spent during billing cycle (sum from day 1+sum for day 2+…)
__________________________________________________________________
Days in days in billing cycle
30 * 31 = 930         930 / 31 = 30

To calculate your finance charges your credit card company would then take this value, your average daily balance, and multiply it by the APR and the number of days in the billing cycle. The credit card company then takes this number and divides it by 365, the number of days in a year. Refer to the equation below for more details.

Average Daily balance * APR * days in billing cycle
_____________________________________________
365

Now that you, as a consumer, are now aware of how your average daily balance impacts your annual finance charges you can use this information to save money. Spending less and lowering your average daily balance will help you save money overall and lower your finance charges from year to year.


Sources:
http://www.investorwords.com/350/average_daily_balance.html
http://www.thetruthaboutcreditcards.com/two-cycle-average-daily-balance-vs-average-daily-balance/
http://credit.about.com/od/creditcardbasics/qt/avgdailybalance.htm

Sybria White

Sybria White

Sybria White is a senior at the University of North Carolina at Chapel Hill. Upon graduation in May 2010, she will leave Carolina with a Bachelor’s Degree in Sociology, a Certificate in Career Development and will be awarded a Public Service Scholar. She plans to attend graduate school to pursue a Master’s Degree in Public Health following taking a year off to contribute to a National Service Program, such as AmeriCorps. Her undergraduate career has taught her the value of a sociological perspective, which has influenced her dedication to public service. She is a volunteer for W.D. Hill Recreation center, Peer mentor for minority students and has served as an active member of several campus organizations such as Sociology club, North Carolina Health Careers and Access Program, Community Government, and Minority Advising just to name a few.

Apart from contributing public service and active involvement on campus, Sybria is very passionate about creative writing and writing in general and hopes to bring a sociological point of view to her articles. Her interests outside of writing and public service include reading books concerning fashion and spending time with her family.

A well rounded curriculum involving Business and English academics in addition to sociology, have helped shaped this young writers’ unique voice. She is eager to share her newly acquired skills and looks forward to helping others approach every day problems from a new, and perhaps, sociological outlook.
Sybria White

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