How To Calculate Average Daily Balance On A Credit Card

The “average daily balance” is a term many of you may have seen printed in terms and conditions or on your billing statement but what exactly does it mean? And, what is the formula that creditors use to calculate the ADB?

average daily balance definition: The average balance on your credit card during a given billing cycle (usually a 30 day period). This is calculated by adding together the balance for each day and dividing that total amount by the number of days in the cycle.

This is by far the most common method credit card companies use for calculating finance charges. Not surprisingly, it’s usually the most profitable formula for them when you contrast it to the adjusted balance method, where interest is based off the balance at the end of the billing cycle (helpful if you make big payments before a cycle’s closing date).
But going back to the average daily balance method, here’s how you calculate it. For simplicity, I will first explain the concept without the finance charges included.

Example: The billing cycle is 30 days

Day 1: The cycle begins with a $1,000 balance
Day 5: A new purchase of $300 is made
Day 10: A minimum payment due of $50 is applied to the account

This would mean that for days 1 thru 4, your daily balance was $1,000. So we would add those up ($1,000 + $1,000 + $1,000 + $1,000 = $4,000).

Then on day 5 you made a purchase of $300 and that means your new balance is $1,300. So for days 5 through 9 your balance would be $1,300 ($1,300 + $1,300 + $1,300 + $1,300 + $1,300 = $6,500).

Now we’re on day 10 when you made a $50 payment. Your new daily balance is $1,250 ($1,300 – $50). Since you have no other activity for the rest of the cycle, that amount would be your daily balance for days 10 through 30 (remember that’s including day 10, so it’s 21 total. $1,250 x 21 = $26,250).

The final calculation – We add up those three totals: $4,000 + $6,500 + $26,250 = $36,750. Now divide that amount by 30 and we get $1,225 as your average daily balance.

But it gets more cumbersome…

Because you have to calculate the balance for each day, it certainly can involve a lot of calculations!

To make matters worse, the example above is a very simple cycle with just 3 events happening. I would suspect most of you out there probably have a lot more going on during a given period. Calculating the average daily balance including new purchases (possibly dozens) and subtracting credits (both payments and returns) will make the math even more tedious. But if you enjoy crunching numbers, then knock yourself out!

What’s the interest?

Now that we’ve finished calculating the average daily balance, the interest charges will be determined for the billing cycle period.

The formula to do this is: (days in billing cycle ÷ 365) x APR x average daily balance. Here’s the math showing those calculations…

Step One: You must determine the amount of interest being charged to your account each month (the stated APR). But first we determine the daily factor to apply by dividing the number of days in your billing cycle by the number of days in a year (30 ÷ 365 = 0.08219). That factoring amount is the fraction of your APR interest you are charged per cycle.

Step Two: We take that 0.08219 and multiply it by your 15% APR (that’s 0.15 on a calculator) and we get 0.01233.

Step Three: The final step is multiplying that 0.01233 by your average daily balance of $1,225. The result? 15.10. That means during that cycle, you were charged $15.10 of interest.

While this mathematical exercise is not easy, at least you can now say you are now among the few that actually understands how it works!

This article was written or last updated February 2016

The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

Hi, I was trying to figure out what would happen if on an ADV, starting let’s say at $3600 and to make things simple, no other charges were made that month. The card has three different inrtest rates. My question revolves around the highest one. What would happen if I paid the $3600 on the 18h billing day of the month which would leave a ADB of $2160. I did however make a additional payment again on the 18th billing day. Min payment is $400 (which goes to the lowest rate), but I pay $800 which the extra $400 would go towards the highest rate. So the question, the $400 would make day 19 below zero which the bank says they treat as zero. I know the $400 will come off the balance due but does that mean I can not lower the ADB of $2160 in the current month? Since the balance in the next month would be close to 0 they would not be able to bring down ADB there either. Would they just apply it against the next lowest interest rate? BTW the reason I ask is because I am using bank transfer money to do this and it doesn’t make sense to use that money for the lowest interest. Sorry this is so long.

Regarding the question of “What happens if you paid the full balance of the card before the due date or before the end of the cycle?”, I have personally had different experiences with different issuers. For example, my U.S. Bank issued Visa card will not charge me interest if I pay the balance in full by the end of the cycle, even if a payment posts after the due date and I had a balance at the beginning of the cycle on which interest was accruing. By contrast, my Chase issued Visa card will charge me interest on the ADB even if I paid off the statement balance in full, unless no interest was charged in the last month. So you can have a $3000 Chase balance, pay it to zero, and have $50 interest charge on your statement, which creates a $50 statement balance. If you wait until the due date to pay the $50 statement balance, the next statement you will have $1 or $2 on there – interest on the statement balance created by last month’s interest! Chase bank stiffs its customers in this way.
So it depends on each card. I was hoping to find some info here as to what Capital One does.

What would happen if Eric pay the full balance on the credit card before the due date or the end of the cycle is he would have a balance the beginning of the cycle with interest. Eric’s Chase visa card charges him interest on the ADB if he paid his credit card in full. Eric has $3,000 of a Chase balance, pay it to zero and have $50 of interest charge which is the statement balance. Eric would have $1 or $2 on his next statement if he waits until the due date to pay the statement balance of $50.

On Alice’s credit card statement from last month her outstanding balance was $831. During the current billing cycle she made additional purchases of $25 on the 10th, and $77 on the 19th. Her payment was received on the 25th for $150. Her billing cycle is 30 days. Find her average daily balance.

1. ($831+$831+$831+$831=$3,324)
2. $25+$77=$102
3. $831+$102=$933
4. $933($933+$933+$933+$933+$933=$4,665)
5. $783($933-$150)
6. ($783*21=$16,443)
7. $3,324+$4,665+$16,443=$24,432 daily balance
8. $24,432/30=$814.40 average balance

So what credit cards still use the adjusted balance or previous balance in determining the interest charges?

Transfer credit cards would save you money for dollars in interest payments. An annual percentage rate balance transfer cards would also be good for you to use which has discounts of interests and a travel rewards that are good sources to use.

What if you paid the full balance of the card before the due date or before the end of the cycle?

Carolyn Rivera

What if you paid the full balance of the card before the due date or before the end of the cycle?

The credit bureau reports a day of a cycle a bill is cut to get a zero balance. The cycle will end and the due date is when you pay before the due date.

Thanks for the simple explanation! You’ve helped a lot.

You are welcome and it is my pleasure to help you out to need my help to give you some understanding with things you needed help with for my solution.