Average Daily Balance Method

Key takeaways

• The average daily balance method is the most common way credit card issuers calculate monthly interest.
• It averages the account balance for each day in the billing cycle, then applies the card’s daily periodic rate.
• Monthly interest = average daily balance × daily periodic rate × number of days in the billing cycle.
• If you pay the full statement balance each month (within the grace period), you can avoid interest.

What it is

The average daily balance method computes interest by averaging the outstanding balance on each day of the billing period and applying the card’s daily periodic rate. The daily periodic rate is the APR divided by 365 (or 366 in a leap year).

How it works (formula)

Monthly interest = Average daily balance × Daily periodic rate × Number of days in the billing cycle

Steps:
1. Determine the balance for each day of the billing cycle (including new charges, credits, and payments depending on the variation).
2. Sum those daily balances and divide by the number of days in the cycle to get the average daily balance.
3. Multiply the average daily balance by the daily periodic rate and by the number of days in the cycle to get the interest charge.

Variations

• With compounding: each day’s balance may include prior day’s accrued interest, so interest compounds daily.
• Without compounding: daily balances exclude previously accrued interest, so interest does not compound within the cycle.
• Inclusion of new purchases: some issuers include new purchases in daily balances for the current cycle; others exclude them until the next cycle.
  The compounding version and inclusion of purchases generally produce higher interest charges.

Example (simplified, no compounding)

• APR: 20% → daily periodic rate ≈ 0.20 / 365 ≈ 0.00055
• Billing cycle: 30 days
• Balance day 1–10: $1,000
• On day 10 a $100 purchase raises the balance to $1,100 for days 11–30

Calculation:
1. Total of daily balances = ($1,000 × 10) + ($1,100 × 20) = $10,000 + $22,000 = $32,000
2. Average daily balance = $32,000 / 30 = $1,066.67
3. Monthly interest = $1,066.67 × 0.00055 × 30 ≈ $17.70

Practices that were banned

Double-cycle billing — which calculated interest based on the average daily balance over two billing cycles and could charge interest on balances already paid off — was banned by the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009.

Grace period

A grace period is the time between the end of a billing cycle and the payment due date. Paying the full statement balance during the grace period typically avoids interest on purchases. Grace periods may not apply to cash advances or certain transactions.

How to find which method your card uses

Your credit card agreement (terms and conditions) must disclose the method used to calculate finance charges. If you don’t have a copy, request it from the issuer — by law they must provide it on request.

Tax treatment

Personal credit card interest is not tax-deductible for personal expenses.

Bottom line

The average daily balance method averages your balance across the billing cycle and applies a daily interest rate. Understanding how it works helps you estimate interest costs and manage timing of purchases and payments. The surest way to avoid credit card interest is to pay your statement balance in full each month.