Average Daily Balance Method

DEFINITION of 'Average Daily Balance Method'

A credit card accounting method where interest charges are based on the amount owed at the end of each day. Under the average daily balance method, each day's balance for the billing cycle is summed then divided by the number of days in the cycle, to compute the average daily balance. The average daily balance is then multiplied by the monthly interest rate to determine the customer's finance charge. The monthly interest rate is calculated by dividing the cardholder's APR by 12.

BREAKING DOWN 'Average Daily Balance Method'

Credit card companies have several options for calculating the balance on which they charge consumers interest. Compared to the previous balance method, the average daily balance method results in less interest due, because payments toward the card's balance immediately lower the amount on which interest is charged.

Under a method that the U.S. government outlawed in 2010, called double-cycle billing, some credit card companies used a consumer's average daily balance over the last two billing cycles as a basis for charging more interest.

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