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Your credit card's average daily balance and annual percentage rate (APR) help determine how much interest accrues if you're revolving a balance. A card's average daily balance can depend on the remaining balance from the previous month, new purchases, interest charges and payments made. However, the average daily balance calculations can also differ slightly from one credit card to another.
What Is Average Daily Balance?
The average daily balance on your credit card is the card's balance at the end of each day divided by the number of days in the billing cycle, which may be 28 to 31 days depending on the month.
To determine your daily balance, you can add up:
- The card's balance at the start of the day
- Today's new charges
- Today's payments and other statement credits
- Fees related to today's transactions, such as foreign transaction fees
Additionally, your card issuer may calculate your daily balance with or without compounding interest. Compounding adds interest charges based on the previous day's balance to your new daily balance. If interest charges don't get included in your daily balance, you won't pay daily compounding interest.
Even if your card issuer uses compounding, however, you won't be charged interest if your card has a grace period and you pay your bill in full each month. In fact, you won't have to pay interest on purchases at all if you continue to pay your statement balance in full.
The Average Daily Balance Method Formula
To find your average daily balance, you'll take the sum of the daily balances over your billing cycle and divide by the number of days in the billing cycle.
For example, if your billing cycle has 30 days and your daily balance was $50 for five days, $300 for 15 days, and $500 for 10 days, the total of your daily balances is $9,750 ($250 + $4,500 + $5,000). Divide $9,750 by 30 to find your average daily balance of $325.
How Your Average Daily Balance Can Impact Your Interest Charges
If you're carrying a credit card balance, your credit card issuer may charge you interest using several different methods. While each method has its own nuances, all of them calculate your interest charges using your daily periodic interest rate, which is your card's APR divided by either 360 or 365—or 366 during a leap year.
- Average daily balance method: Your average daily balance is multiplied by your daily periodic interest rate to determine how much interest you pay for each day of the billing cycle.
- Daily balance method: Your daily balance is multiplied by your daily periodic interest rate to determine how much interest you pay for each day of the billing cycle.
- Previous balance method: The balance at the start of your billing cycle is multiplied by your daily periodic rate, and the result is multiplied by the number of days in your billing cycle.
- Adjusted balance method: Your balance at the end of your billing cycle is multiplied by your daily periodic rate, and the result is multiplied by the number of days in your billing cycle.
Your credit card statement could tell you which method your card uses and how many days are in the statement's billing cycle. Your cardholder agreement may have more details about how your card issuer calculates your daily periodic rate and interest charges.
Average Daily Balance Method Example
Putting it all together, let's see how your average daily balance and daily periodic rate determine your interest charges if your card uses the average daily balance method with compounding.
Here's the scenario:
- You're in the process of paying down your credit card balance. Your card has a 22% APR and a $1,000 balance on the first day of the billing cycle.
- The daily periodic rate is 22% divided by 365, or 0.0603%
There aren't any transactions during the first three days, but you make a $100 purchase on day four and then a $200 payment on day six. Here's how the first week plays out:
| Day | Beginning Daily Balance | New Transactions/Payments | Daily Periodic Rate | Interest Charge | Final Daily Balance |
|---|---|---|---|---|---|
| 1 | $1,000 | $0 | 0.0603% | +$0.60 | $1,000.60 |
| 2 | $1,000.60 | $0 | 0.0603% | +$0.60 | $1,001.20 |
| 3 | $1,001.20 | $0 | 0.0603% | +$0.60 | $1,001.80 |
| 4 | $1,001.80 | +$100 | 0.0603% | +$0.66 | $1,102.44 |
| 5 | $1,102.44 | $0 | 0.0603% | +$0.66 | $1,103.12 |
| 6 | $1,103.12 | -$200 | 0.0603% | +$0.54 | $903.66 |
| 7 | $903.66 | $0 | 0.0603% | +$0.54 | $904.20 |
At the end of the 30-day billing cycle, the card issuer adds up the final daily balances and divides the sum by 30 to find the average daily balance. It then multiples the average daily balance by the daily periodic rate, and multiplies the result by the number of days in the billing cycle to determine the total interest charges.
If you don't make any additional purchases or payments, the average daily balance is $982.32 at the end of the billing cycle. So, you'll owe $17.77 in interest ($982.32 x 0.0603% x 30).
The Bottom Line
While the specific calculations and methods vary, your daily balance will often impact your interest charges if you're revolving a credit card balance. That's why paying down the balance quickly and avoiding new charges while you're accruing interest could help you save money.
Plus, paying down credit card balances could help you improve your credit score, which may make it easier to qualify for a loan or credit card with a lower interest rate. You can check your credit score for free through Experian, and you'll receive free credit monitoring with alerts for important changes.