The average daily balance method of calculating finance charges uses the average of your balance during the billing cycle. Your average daily is the sum of your balance on each day of the billing divided by the number of days in the billing cycle.
Here is the calculation for the average daily balance method: average daily balance * APR * days in billing cycle / 365
Calculating the Average Daily Balance
Let’s say your APR is 12% and your billing cycle is 25 days long.
You started the billing cycle with a balance of $100. On Day 4, you made a $100 purchase. On Day 20, a $25 payment was credited to your account. Your daily balance during the billing cycle was:Day 1 – 3: $100
Day 4 – 20: $200 ($100 purchase)
Day 20 – 25: $175 ($25 credit)
To calculate your average daily balance you must total your balance from each day in the billing cycle and divide by the number of days in the cycle.
(Day 1 Balance + Day 2 Balance + Day 3 Balance…) / number of days in billing cycle$4575 / 25 = $183
Calculating the Average Daily Balance Finance ChargeBased on the details listed above, your finance charge using the average daily balance method would be:
$183 * .12 * 25 / 365 = $1.50
If you continued making minimum payments and no additional charges on this account, you'd pay $18.00 in finance charges over the course of a year.