The Average Daily Balance is a calculation method often used by credit card companies to calculate the interest charges for a billing cycle. It’s computed by adding up the balances from each day of the billing cycle and then dividing the result by the total number of days in that cycle. This method can impact the amount of interest charged to the cardholder’s account.
1. How is credit card interest calculated using the Average Daily Balance method?
Credit card interest using the Average Daily Balance method is calculated by first adding all the daily balances for the billing cycle, then dividing the result by the number of days in the billing cycle. This gives you the Average Daily Balance. The interest charge is then computed by multiplying the Average Daily Balance by the credit card’s Daily Periodic Rate, which is the APR divided by 365.
2. Is the Average Daily Balance the same as the statement balance?
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No, the Average Daily Balance isn’t the same as the statement balance. The statement balance is the total amount you owe at the end of the billing cycle, while the Average Daily Balance is the average balance you carried on your credit card during that cycle.
3. Can the Average Daily Balance affect my credit score?
Indirectly, yes. The Average Daily Balance doesn’t directly impact your credit score, but maintaining a high balance can affect the ‘amounts owed’ factor in your credit score calculation, which accounts for 30% of your total score. Keeping your balances low can help to improve this factor and possibly boost your credit score.
4. What’s the best strategy to minimize the impact of the Average Daily Balance on interest charges?
To minimize the impact of the Average Daily Balance on interest charges, try to pay off your balance in full each month. If that’s not possible, aim to pay more than the minimum payment and earlier in the billing cycle when possible.
5. Is the Average Daily Balance method used for other types of credit?
Yes, the Average Daily Balance method is also used for other types of revolving credit, like home equity lines of credit (HELOCs). However, it’s most commonly associated with credit cards.