Introduction
The average daily balance method is a common accounting method that calculates interest charges by considering the balance invested or owed at the end of each day over the billing period. It does not take an average balance throughout the billing cycle.
What are the Other Methods Available?
There are two other common methods used to calculate the interest applicable apart from the average daily balance method, i.e. previous balance method and adjusted balance method.
The previous balance method charges interest based on the amount owed at the beginning of the previous month. The calculation will be carried out at the end of a billing cycle. When it comes to the adjusted balance method, the finance charges are calculated based on the amount owed at the end of the current billing cycle, after the credit and payments are posted.
How it Works?
The average daily balance method considers the total each day's balance over the billing cycle divided by the total number of days in the cycle.
The outcome is multiplied by the interest rate to figure out the customer's finance charges. Finance charges are calculated by dividing the cardholder's APR by 12.
