How To Calculate Average Daily Balance On A Credit Card

The “average daily balance” is a term we’ve all heard many times before, but what exactly is it? And what is the formula that creditors use to calculate it?

average daily balance definition: The average balance on your credit card during a given billing cycle (usually a 30 day period). This is calculated by adding together the balance for each day and dividing that total amount by the number of days in the cycle.

This is by far the most common method credit card companies use for calculating finance charges. Not surprisingly, it’s usually the most profitable formula for them when you contrast it to theadjusted balance method, where interest is based off the balance at the end of the billing cycle (helpful if you make big payments before a cycle’s closing date).

But going back to the average daily balance method, here’s how you calculate it. For simplicity, I will first explain it without the finance charges included.

Example: Your billing cycle is 30 days

Day 1: You begin the cycle with a $1,000 balance on your credit card
Day 5: You make a new purchase of $300
Day 10: You make a payment of $50

This would mean that for days 1 thru 4, your daily balance was $1,000. So we would add those up ($1,000 + $1,000 + $1,000 + $1,000 = $4,000).

Then on day 5 you made a purchase of $300 and that means your new balance is $1,300. So for days 5 through 9 your balance would be $1,300 ($1,300 + $1,300 + $1,300 + $1,300 + $1,300 = $6,500).

Now we’re on day 10 when you made a $50 payment. Your new daily balance is $1,250 ($1,300 – $50). Since you have no other activity for the rest of the cycle, that amount would be your daily balance for days 10 through 30 (remember that’s including day 10, so it’s 21 total. $1,250 x 21 = $26,250).

The final calculation – We add up those three totals: $4,000 + $6,500 + $26,250 = $36,750. Now divide that amount by 30 and we get $1,225 as your average daily balance.

But it gets worse…

Because you have to calculate the balance for each day, it certainly is a lot of number crunching!

To make matters worse, the example above is a very simple cycle with just 3 events happening. I would suspect most of you out there probably have a lot more going on during a given period. Calculating the average daily balance including new purchases (possibly dozens) and subtracting credits (both payments and returns) will make the math even more tedious.

What’s the interest?

Now that we’ve finished calculating the average daily balance, it’s time to figure out what the interest charges will be on it.

The formula to do this is: (days in billing cycle ÷ 365) x APR x average daily balance. Here’s the math showing those calculations…

Step One: We need to find out how much you’re paying in interest per month. To do this we first divide the number of days in your billing cycle by the number of days in a year (30 ÷ 365 = 0.08219). That amount is how much interest you are charged per cycle.

Step Two: We take that 0.08219 and multiply it by your 15% APR (that’s 0.15 on a calculator) and we get 0.01233.

Step Three: The final step is multiplying that 0.01233 by your average daily balance of $1,225. The result? 15.10. That means during that cycle, you were charged $15.10 of interest.

I never said said this was easy, but at least you now understand how it works!