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.

Investopedia explains '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.


Filed Under: ,

comments powered by Disqus
Hot Definitions
  1. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
  2. Marginal Analysis

    An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables.
  3. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  4. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  5. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
  6. Class Action

    An action where an individual represents a group in a court claim. The judgment from the suit is for all the members of the group (class).
Trading Center