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The Daily Average Balance is one of the three most
common methods that
credit card issuers use to calculate the
amount of interest they charge on your credit card
balance. The other methods are called the
"previous balance method" and the "adjusted
balance method." Of the three, the Average Daily
Balance method costs you the most in interest
charges.
How The Average Daily Balance is Calculated
The card issuer adds together your balance for
each day and then divides it by the number of days
in the month.
For example:
Let's say that for each day from January 1st
through January 15th, you make a $10 purchase.
Then, on January 16th you make a $1,000 purchase.
You make no more purchases for that month. You
average daily balance would be $38.33.
That amount is then multiplied by a constant
factor which determines your interest charge. The
end result works out to be the same as if the card
issuer had charged you interest on your balance at
the end of each business day.
A variation of the Average Daily Balance method is
called the Two-Cycle Average Daily Balance Method
which calculates the daily balance over the two
previous billing cycles.
Make sure that you understand how interest is
charged on your card and what it really costs you
to use it. |
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