1. What is the Average Daily Balance Method?

The Average Daily Balance method is a common way credit card companies calculate interest charges. It sums the balance for each day in the billing period, then divides by the number of days to get the average balance, which is used to compute interest.

2. How Does the Calculator Work?

The calculator uses the Average Daily Balance formula:

Where:

• \( ADB \) — Average Daily Balance (currency unit)
• \( APR \) — Annual Percentage Rate (as a decimal)
• \( Days \) — Number of days in billing cycle
• \( I \) — Interest (currency unit)

Explanation: The equation calculates interest by converting the annual rate to a daily rate, then applying it to the average balance over the billing period.

3. Importance of Interest Calculation

Details: Understanding how credit card interest is calculated helps consumers make informed decisions about payments and debt management.

4. Using the Calculator

Tips: Enter your average daily balance in dollars, APR as a percentage (e.g., 18.99), and the number of days in your billing cycle (typically 30-31).

5. Frequently Asked Questions (FAQ)

Q1: How is average daily balance calculated?
A: Sum your daily balances for the billing cycle, then divide by the number of days in the cycle.

Q2: Does this include new purchases?
A: Yes, new purchases increase your daily balance from the day they post to your account.

Q3: How can I reduce interest charges?
A: Pay your balance in full each month, or make payments earlier in the billing cycle to lower your average daily balance.

Q4: Is interest charged if I pay my full balance?
A: No, if you pay the statement balance by the due date, you typically avoid interest charges.

Q5: Do all credit cards use this method?
A: Most do, but some may use other methods like adjusted balance or previous balance methods - check your card agreement.